The Incredible Shrinking Stock Market – Investopedia

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Even as the American economy grows, many average investors are losing opportunities to own a piece of it. The number of public companies plunged by 37% to 5,734 as of June 2016 from a peak of 9,113 in 1997, according to the Center for Securities Research at the University of Chicago, as reported in the Wall Street Journal.

In fact, today the U.S. has roughly as many public companies as in 1982, yet real gross domestic product (GDP) is about 2.6 times greater, according to the Federal Reserve Bank of St. Louis. Partly due to mergers, the size of the average public company is now over three times what it was in 1997, even after adjusting for inflation, according to the University of Chicago data cited by the Journal on January 6.

Is the Public Market Dying?

Writing for the website Seeking Alpha, investment advisor Louis Navellier looks at the same Journal article and makes the provocative claim that “the overall U.S. stock market is slowly dying and will continue to ‘melt up’ on order imbalances due to persistent inflows from the ETF, mutual fund, and pension industries into a shrinking share base.” He points out that aggressive share repurchases by companies are another key contributor to the shrinkage of available shares.

The Tale of Tech

The technology industry illustrates the growing importance of private companies and private funding, which is also narrowing opportunities for average investors to participate in this sector. Data from Dealogic indicates that there were only 26 tech IPOs​ listed in the U.S. in 2016, and they raised $4.3 billion. By contrast, private tech firms obtained late-stage funding 809 times, raising $19 billion, according to Dow Jones Venture Source.

Overall, there were 111 IPOs listed in the U.S. in 2016, raising $24.2 billion, per Dealogic. That dollar figure is down 33% from 2015 and is the lowest since 2003, the Journal notes.

Lost Investment Opportunities

As promising startups remain private longer, the average investor is shut out from participating in their most rapid stages of growth, the Journal observes. By contrast, many of the most famous tech companies went public relatively early in their growth cycle. Apple Inc. (AAPL), Microsoft Corp. (MSFT) and Amazon.com Inc. (AMZN) have risen, respectively, over 51,000%, 92,000% and 81,000% from their IPO values.

Today, the likes of Airbnb, Uber Technologies Inc. and Snap Inc. are remaining private into later stages of development. When, and if, they finally go public, opportunities for average investors to score similar post-IPO gains may be a thing of the past. Airbnb, now valued at an estimated $30 billion, was able to raise $850 million last year from private sources, more than either Microsoft or Amazon.com netted from their IPOs.

Dangers of Being Public

It seems likely this shrinkage will continue. University of Michigan business professor Jerry Davis told the Journal “There’s no great advantage to being public.” Instead, he says, “The dangers of being a public company are really evident.” These include having to disclose information useful to competitors, and having to satisfy investors who demand short-term results.