Global Equity-Supply Shortage Long-Term Positive

• There’s a global supply shortage of stocks as fewer companies go public and buyback programs surge.
• Net issuance of new stock by global companies has turned the most negative since 1999, according to JPMorgan.
• “Every year, due to buybacks, globally we remove $1.2 trillion worth of stocks from the markets that can be bought by investors,” Josh Brown of Ritholtz Wealth said.

A deluge of buybacks, fewer secondary equity offerings, and a tepid IPO market are contributing to a global supply shortage of stocks, according to a recent note from JPMorgan.

The analysis, conducted by JPMorgan’s Nikolaos Panigirtzoglou, shows that more than $1 trillion worth of stocks are being removed from global markets every single year via corporate stock buybacks. 

So far this year, the global universe of public equities has shrunk by a net $120 billion, according to JPMorgan, marking the most negative year of net new stock issuance since 1999. 

And if the supply of global stocks is dwindling, as long as demand remains constant or increases, stock prices should continue to rise.

That’s the thinking of Ritholtz Wealth Management CEO Josh Brown, who said in a podcast appearance on Thursday that — barring another surge in new companies going public like in 2021 — stock prices should see a long-term tailwind from the ongoing decline in the supply of stocks.

“Every year, due to buybacks, globally we remove $1.2 trillion worth of stocks from the markets that can be bought by investors. It’s a fact and it’s not going to change and in fact this year it will go higher. Both in the US, but now abroad, as country after country look at the US model and they say ‘actually you know how you fix your economy? Fix your capital markets first,” Brown said on CNBC’s Halftime Report.

“China’s doing it, Japan is doing it, Larry Fink just dedicated his entire dear shareholder letter to 17 countries around the world engaging in this idea ‘Hey let’s do what America did, let’s get our stock market fixed’. So that’s taking place, and that will involve more and more buybacks which means less and less places for money to go,” Brown said.

Another source of cash that will be used to gobble up companies is private equity, which is sitting on about $2 trillion worth of dry powder waiting to be invested. Not to mention the more than $6 trillion sitting in money market funds that could eventually be funneled into the stock market.

“That’s more companies leaving the market,” Brown said. “There are three-thousand-something stocks, when I started in this business, there were 7,000. Now most of those missing stocks are penny stocks, so throw that out. But still, the Wilshire 5000 can’t even muster an index, there’s not enough public equities to fill it.”

“Here’s the bottom line. Absent another five years like 2021 where every piece of shit on the planet can come public, we are just not going to have enough issuance to satiate the pools of capital that need to put money to work in equity markets,” Brown said on the subject in his podcast episode this week.

Other tailwinds for the stock market include continued disinflation, potential interest rate cuts from the Federal Reserve, the growing adoption of artificial intelligence, according to Brown.