Think Global to Avoid Shrinking U.S. Stock Market

March 27, 2017

Ben Carlson, quoting research from Dimson, Marsh and Staunton in their Global Investment Returns Yearbook 2017, has some fascinating stats on worldwide publicly listed companies today versus just 20 years ago.

According to CRSP data, there were more than 9,100 U.S.-listed public companies in 1997. Today, that number is down to slightly more than 5,700. The Wilshire 5000, an index used as a proxy for all U.S. securities with readily available pricing data, holds just over 3,600 stocks as of the start of this year, down from more than 7,500 in 1998. So the number of stocks that trade on the exchanges has basically been cut in half over the past 20 years or so. There are a number of reasons for this change — increased regulations to go public, fewer IPOs, lax anti-trust laws, venture-backed companies staying private longer and a winner-takes-all marketplace in many industries.

Investors are worried that the shrinkage in the number of U.S. companies means that wealth and the markets themselves are becoming more concentrated in fewer and fewer hands. Fewer investment options could make it harder for investors to find adequate investment opportunities. For those investors who share these worries my advice would be to look abroad for more investment opportunities. While U.S.-listed companies have seen their ranks diminish since the 1990s, there are now more public companies than ever worldwide.

According to Dimensional Fund Advisors, the number of companies listed on global stock market exchanges has increased from about 23,000 in 1995 to 33,000 by the end of last year. So while the number of companies in the U.S. has shrunk the number of companies worldwide has exploded.

These are very important trends that have a variety of meaningful implications for investors.  As it relates to international equity exposure, more choices can be a good thing if investors have a logical framework to analyze this broad universe of securities.  We are partial to using relative strength to evaluate any given universe of securities, but perhaps the rationale for doing so is even greater for international equities.  It is one thing for a fundamental analyst to become an expert in U.S.-listed securities.  There is a common currency, one government, one set of regulations, and so on, but when it comes to international equities, an investor is dealing with much, much greater complexity of fundamentals.  However, for a relative strength-driven strategy, it always comes back to price, which makes international investing no more complicated than investing here in the U.S. from a portfolio construction perspective.

John Lewis, our Senior Portfolio Manager, did an interview with HedgeWeek recently in which he delved into more of the reasons why we think there are so many opportunities when it comes to international equities.  That interview focused on why we think ADRs are a great way for US investors to get this exposure.

This trend of more and more securities being listed abroad and fewer here in the U.S. is something that should be a topic of conversation with your clients.  Being able to provide them with some strong options for international equities is another important way that you can help them navigate growing global investment opportunities.

The relative strength strategy is NOT a guarantee.  There may be times where all investments and strategies are unfavorable and depreciate in value.  There are risks inherent in international investments, which may make such investments unsuitable for certain clients. These include, for example, economic, political, currency exchange, rate fluctuations, and limited availability of information on international securities.

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