Is the Stock Market Dead?

Navigating the private markets amid a shrinking universe of public companies

 

For generations, the stock market has provided a pathway to the American dream. Millions of families have saved and invested in public companies, and as those businesses have grown, they’ve purchased homes, started their own businesses, sent their children to college, planned for retirement and built generational wealth. But with fewer companies going public, many investors are asking: Is the stock market dead?

Though public markets remain important and should continue to comprise the bulk of an investor’s portfolio, it is no longer the sole vehicle for wealth creation.

A Shrinking Market

Between 2011 and 2021, the number of public companies decreased by 0.18% per year while the share of private companies increased by 12.2%. In 1996, the stock market was at its all-time high—with more than 7,000 publicly traded U.S. companies. Today, that number has fallen to slightly more than 4,000, which is tiny fraction of the 1.86 million private U.S. companies with 50+ employees, as of 2022.

Large, multi-billion-dollar companies such as SpaceX and OpenAI are choosing to forgo the public markets, which bring added regulations and operational challenges, turning instead to private equity to provide them with the liquidity to invest and grow their businesses.

What does this dearth of public companies mean for retail investors?

Young companies offer the most growth potential. With companies remaining private for longer because access to capital is abundant, investors in the public markets may struggle to gain an edge. Think of it like this: If you invested just $100 in Amazon on May 15, 1997—the day it went public—your shares would be worth more than $200,000 today.

A Fuel for Wealth Creation

Buying and holding stock from growth-oriented companies drives wealth creation, but that is getting more difficult to do as businesses wait to fully mature before going public.

Over the past 20 years, private companies have not only outperformed the public markets; they’ve also been more likely to withstand periods of significant market turmoil. This was especially true during the Great Financial Crisis. From 2009 to 2011, private equity funds outperformed those from the 2006-to-2008 market cycle, which underscores the long-term stability of private equity investments in a wide range of economic environments.

However, most investors haven’t had access to these opportunities. You can’t simply open an account on a trading platform and buy shares like with the stock market. Fortunately, private equity, which has long been reserved for institutional and ultra-high-net-worth investors, is now becoming more widely accessible to mass affluent and high-net-worth retail clients.

Investors looking to diversify into private equity should work with a financial advisor who has deep experience in the space and a strong network. As a boutique, independent firm, we have unique direct access to private company opportunities and highly respected fund managers, with a focus on well-established companies.

Balancing Risk & Reward

Of course, not all private equity is created equal. Venture capital is a subset of private equity that focuses on early-stage companies. Investing in venture capital can be far riskier because these companies haven’t yet demonstrated their ability to produce stable cash flows. When considering investment opportunities, we generally look for established companies across a variety of sectors to ensure a well-diversified portfolio.

A Promising Horizon

Today, we’re entering what could be a golden age for private equity. After years of high inflation, interest rates are declining, and fund managers are looking for opportunities to return capital and exit some of their investments. This will free up cash to invest in new opportunities.  Additionally, we expect to see a looser regulatory environment in the coming years, which will help to fuel further opportunities for M&A investment.

So, while the stock market isn’t dead, it is fair to say that the traditional 60/40 stock-bond portfolio is obsolete. Stocks and bonds should still be the bread and butter of an investment portfolio. But as investors look to balance risk with potential returns, private equity is becoming an important vehicle.

If you want to diversify into this sector, it’s important to work with a professional who partners with the right firms with the requisite expertise, knowledge and deep network to invest in high-quality companies with stable earnings and free cash flows.

Reach out for more information on private equity and investment strategy.

  

Palumbo Wealth Management (PWM) is a registered investment advisor. Advisory services are only offered to clients or prospective clients where PWM and its representatives are properly licensed or exempt from licensure. For additional information, please visit our website at www.palumbowm.com.

The information provided is for educational and informational purposes only and does not constitute investment advice and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell a security. It does not take into account any investor’s particular investment objectives, strategies, tax status or investment horizon. You should consult your attorney or tax advisor.

The views expressed in this commentary are subject to change based on market and other conditions. These documents may contain certain statements that may be deemed forwardlooking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected. Any projections, market outlooks, or estimates are based upon certain assumptions and should not be construed as indicative of actual events that will occur.

All information has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy, reliability or completeness of, nor liability for, decisions based on such information and it should not be relied on as such.

All information has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy, reliability, or completeness of, nor liability for, decisions based on such information, and it should not be relied on as such.

The views expressed in this commentary are subject to change based on the market and other conditions. These documents may contain certain statements that may be deemed forwardlooking statements. Please note that any such statements are not guarantees of any future performance, and actual results or developments may differ materially from those projected. Any projections, market outlooks, or estimates are based upon certain assumptions and should not be construed as indicative of actual events that will occur.

Past performance is no guarantee of future returns.

 

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By: Adam