We’re shrinking, according to a new study prepared for the National Bureau of Economic Research: as a class, the total value of U.S. publicly traded equities is half as large as it was in the mid-1990s, and 25% smaller than it was in 1976. The explanation for this is detailed but it’s not complicated: the reduction in the number of publicly traded companies on U.S. exchanges has declined significantly (from more than 8,000 in 1996 to 3,627 in 2016), mainly because a growing number of U.S. companies have found it more profitable to remain privately held, or to list their shares on foreign exchanges. This fact is a comment on securities regulation in the U.S., of course, and on strategic principles like “value creation” taking precedence over “shareholder return” as a guide for corporate managers. But, it also reflects a very regrettable change in the personal values of millions of individuals: we demand results, not progress; we want gains, not rewards. We’ll accept gratuities rather than wait for maturity.
The author of the NBER report, finance professor René Stulz, concluded not only that the overall number of publicly held firms is reduced but also that corporate profits are largely reserved for a select number of very large firms (e.g., Apple, Google), while the remaining companies struggle to report real gains.
According to Stulz, one parallel observation of this shift is that capital-intensive companies (e.g., manufacturers) have been displaced as value-generators by companies whose wealth is rooted in intellectual property: software development and bio-engineering are more cost-effective enterprises than producing parts or finished products.
Thus, the new giants of the market are a much more significant wealth-generators than a former blue chip like General Electric, but because there are far fewer top-shelf companies than in the past there is less competition among them, fewer opportunities for investors, and overall a less transparent market.
And, these big companies are comparatively much larger now than former greats: In 1975, 61.5% of publicly traded firms had assets worth less than $100 million (adjusted for 2015 dollars); by 2015, only 22.6% of companies were so valued. There are “upstart” companies, but you probably will not find them on a public exchange. “It’s not possible for the general public to invest in a diversified portfolio of really small, publicly traded companies in the way they could a few decades ago,” Stulz said.
None of this “shrinkage” was planned, of course. Lately we have developed the habit of crediting technological progress for the improbable growth in corporate profits during the 1980s and 1990s, but an equally important factor in that growth was the prominence of individual stockholding via mutual funds, employee stock options, payroll contributions, individual retirement accounts, and other instruments that gave many millions of people a viable outlet for their financial aspirations. Not incidentally, it encouraged long-term planning and financial awareness. It promoted personal and responsibility and social cohesion.
There is no simple or singular reason that all this positive growth shifted in a different direction, but a young worker today is unlikely to have many similar opportunities to plan his or her future. That Americans today are said to be less disciplined, more self-serving, more isolated from their peers and neighbors, and less optimistic about their futures, is not unrelated to economic setting we inhabit now.