Economics 101 teaches us that prices move based on Supply and Demand. I will explain how supply is shrinking while demand is increasing in this newsletter.
Supply is Shrinking
Reason 1. There are less companies publicly traded today than in the past. Some companies never go public as private equity has grown in popularity, mergers and acquisitions remove companies from the public markets, and many companies leave the market due to business discontinuance.
Reason 2. Stock buybacks have become a popular tool for large companies that have excess cash flow and believe that their stock price is undervalued. They may also think that is better than leaving the money in cash or buying another company. Some companies like Apple (AAPL) do this far more than they issue dividends and feel that it is also better for shareholders.
Demand is growing
There are so many sources of demand for stocks currently.
- Peoples’ wealth has increased over time and many feel investing in the stock market is a smart way to increase wealth as well as hedge inflation.
- 401k programs and other retirement plans, 529 and other college savings plans, variable insurance policies and many more investments use stocks and funds to provide opportunities for people to invest.
- Pensions, colleges and insurance companies invest their excess cash into stocks to get gains that exceed the returns that cash and/or banks offer.
- As stated above, stock buybacks are growing every year.
Investing involves risk, including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values. Asset allocation does not ensure a profit or protect against a loss. Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance. Past performance does not guarantee future results.
Dividend payments are not guaranteed and may be reduced or eliminated at any time by the company.