Midyear Investment Review and Outlook : MARKET TRENDS
A look at some of the new and ongoing market trends that could affect your investment portfolio:
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Stock ‘Supply’ May Soon Dry Up: One of the stock market’s ongoing “problems” since 1992 has been an avalanche of stock offerings by newly public companies and by established companies. With those shares pouring into the market and soaking up investors’ dollars, there has been less free capital available to chase existing stock. That’s at least a partial explanation of why major stock market indexes have risen so slowly over the past two years, some analysts say. The blue chip Standard & Poor’s 500 index, for example, rose just 4.5% in 1992, then 7.1% last year. So far in this year’s market pullback, the S&P; is down 4.8%.
In 1993, a record 626 companies made initial public offerings (IPOs), raising $40.8 billion, which also was a record, according to data tracker Securities Data Co. In addition, secondary stock offerings, or sales of additional shares by already public companies, raised a record $48.4 billion last year in 735 separate offerings, Securities Data says.
So far this year, as the stock market has turned dicier, the pace of IPO and secondary offerings has naturally slowed--but perhaps not as much as some Wall Streeters might have expected.
Securities Data says 303 companies made IPOs in the first half, which was actually higher than the 248 that went public in the first half of 1993. But because the average deal was smaller in this year’s first half, the dollars raised in IPOs totaled $16.5 billion, down from $18 billion in the 1993 first half.
Secondary offerings dropped more sharply this year: Only 242 made it to market in the first half, raising $17.7 billion, compared to 344 offerings that raised $21.7 billion in the first half of 1993.
Of course, the argument that new stock issues are a problem for the market is relative. Stock issuance transfers capital directly to companies from investors, giving the businesses the wherewithal to expand, pay off debt or otherwise improve their financial positions. Fresh capital used wisely by a business eventually contributes to economic growth, which is good for the stock market in the long run.
Still, as new stocks crowd onto the market, they naturally absorb dollars that might have chased existing shares and bid prices higher. And as IPO deals get smaller in size--as they have this year--that’s usually a sign that riskier companies are in the market, trying to raise capital. Indeed, Securities Data says 69 of the second quarter’s 149 IPOs ended up going to market at per-share prices below their initial targets.
“What that says is that many of these companies were willing to compromise just to get their deals done,” Securities Data analyst Robert Liu says.
As long as the public was pushing record amounts of new money into stock mutual funds, the IPO and secondary share offerings had willing buyers in the fund managers--many of whom were eager for IPOs, in particular, for the chance of a fast gain in a hot new issue. But most mutual fund companies report that public inflows dwindled in June; that could signal the end of the new stock wave--which in turn might provide some better, if eventual, support for the broad market.
Slowing Supply
The stock market’s lousy performance in the first half meant fewer companies could sell new stock. Chart shows dollar volume of initial public offerings and secondary stock offerings:
IPOs*
Billions of dollars 1st half ‘93: $18.0 2nd half ‘93: $22.8 1st half ‘94: $14.7
Secondaries
Billions of dollars 1st half ‘93: $21.7 2nd half ‘93: $26.7 1st half ‘94: $16.5
* IPO totals exclude closed-end funds.
Source: Securities Data Co.
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Why Market Volatility May Worsen: It became convenient in the first half to blame those multibillion-dollar “hedge” funds, run by quick-fingered global traders, for everything but cancer. Even so, some Wall Street veterans believe the markets are indeed being riled by hedge fund activity to a degree that could help drive more already-frustrated individual investors from stocks and bonds. Arnold Kaufman, editor of Standard & Poor’s Corp.’s Outlook investment newsletter in New York, notes that hedge funds “anticipate trends in markets, then sell on the news--they’re quick to grab their profits” and move on to something else. That is quite different from the actions of true investors, Kaufman notes, and different even from the somewhat predictable actions of the computerized “program” traders who were vilified in the ‘80s for causing wild market swings. Because the hedge funds have grown so large in recent years--they’re increasingly attracting money from wealthy investors--Kaufman worries about their ability to promote greater volatility. “They have a major influence at the margin,” Kaufman says, and it’s at the margin that markets are made or broken.
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Echoes of Bears Past: James Stack, who pens the InvesTech Market Analyst newsletter from Whitefish, Mont., and who is an unrelenting bear on stocks today, recently unearthed a market story published in the Nov. 11, 1968, issue of U.S. News and World Report. At that point, enthusiasm for Wall Street was running high; little did most investors know that stocks were one month away from beginning a bear market decline that would take the Dow Jones industrials from about 1,000 to 650 over 18 months--a 35% plunge. What Stack found ominous about the U.S. News story was that it included many of the same arguments often given today by the bulls who see a glorious decade for stocks ahead. Among the story’s highlights:
* “There is likely to be a wide and continuing gap between demand for and supply of equities in the next 10 years.”
* “There has been a marked change in where people have been putting their savings. In recent years, the trend has been away from bank deposits and life insurance. . . . Stocks have clearly become the most important savings vehicle for the consumer.”
* “Banks in many instances are trying to get legal permission to offer mutual funds. Life insurance companies (also) are entering the mutual fund industry.”
* “Stock prices on average may more than double in the next 10 years. Behind the expected surge: growth in the U.S. economy and in business profits and, even more important, soaring demand for common stocks by individuals, institutions and other investors.”
In fact, Stack notes, the Dow was actually lower in late 1978 than it had been 10 years earlier, when the story was written. A buyer of the Dow stocks in 1968 had to wait nearly 20 years just to see their value double.
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Corporate Insiders Are Bullish: If a bear market is looming, it isn’t registering with many corporate executives. They are buying their own stocks at a pace not seen in two years, according to the Insiders newsletter in Ft. Lauderdale, Fla. The newsletter’s Insider Indicator, which tracks the percentage of corporate insiders buying stock in their own companies over the prior five weeks compared to the percentage selling, has reached 50% buyers--the highest since mid-1992. The index measures only open-market trades (not stock-option-related purchases), so any time there are at least 50% buyers, it is a solidly bullish indicator, the newsletter says. Reason: More insider sellers than buyers is the norm, because while stock often is acquired in option transactions, it is generally only disposed of on the open market. When insiders are buying heavily on the open market--using their own money to buy at the same price the public would pay--it suggests the executives believe their own shares are bargains.
