george castanza

Stock Market Shrinkage

No one believes the shrinking US middle class is a good thing for the country’s future. Highlighting the increasing inequality has been all the rage over the past few years and rightfully so. The top 1% own almost 40% of the wealth in this country, the top 10% hold 76%. On the other hand, the bottom 80% hold only 11% of the nation’s wealth and the bottom 90% hold almost three quarters of the debt. How is this a recipe for prosperity for all?

Our society isn’t the only place experiencing this, there is a similar trend happening in the US Stock Market. Today there are just over 3,800 publicly traded companies, down by a half since a high of just over 7,500 in 1997. Companies like Bank of America, Exxon Mobil, Wells Fargo, Alphabet (Google), Amazon, Apple, JP Morgan Chase, etc. just grow bigger and bigger, either gobbling up other smaller companies or crowding the space making it nearly impossible for startups or for smaller competitors to survive. According to research conducted by finance professors Kathleen Kahle and Rene Stulz, 84% of all corporate profits are generated from just 100 of the most profitable firms. 40 years ago it was less than 50%.

With more regulations it is more difficult and costly to go public and there is enough venture capital out there to privately fund companies like Airbnb, Uber, Lyft, etc. However, this doesn’t explain the 50% drop and ever slowing pace of IPOs. Part of the problem is the pipeline, don’t be fooled by shows like Shark Tank and all the hoopla around startups, there aren’t enough startups to replace the companies being lost to mergers or run out of business.

I’m no wizard or fortune teller so I don’t know what all of this means for the stock market or the future of the US economy. I do know inequality isn’t good for society so I don’t see how it could be good for the stock market either. Power in the hands of few seldom leads to positive outcomes. This subset of ultra-large companies will have increased influence over Washington and state and local governments (and international governments) which could be detrimental for tax policy, consumer protections, minimum wage increases, etc.

I’m also very concerned about the effects this could have on individual investors like myself. We all have flocked to the low cost and better performing world of index funds (both mutual funds and ETFs) which are often heavily weighted with the companies that generate the most profits. However, what if some of these stocks start to crack, show a decline in revenue or sales? Will the next recession hit more rapidly and be deeper and longer because everyone is invested in same stocks via the same types of index investments? And with a decreasing pool of alternative stocks in the market, a pool of stocks that account for just 16% of corporate profits, where could one find a reprieve when the big players stop working?

I fear if economy takes a turn for the worst this could be one of things people point back to as something so obvious everyone should have seen it coming. For now though I’ll keep betting on the market with my winning index funds – with an eye out for other alternatives.

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