Investors are pulling their money out of the US stock market at a near-record pace as storm clouds gather over the US economy. Bank of America analysts reported that their clients have been large net sellers of US stocks for five weeks in a row, with a sell-off of $5.7 billion more in stocks than purchases last week. The stock market isn't the economy, as its influence over the macro environment has been fading for some time. The number of publicly traded companies in the US has decreased from 7,300 in 1996 to about 4,300 today. Fear is currently driving the US market, according to CNN's Fear and Greed Index. The widening gap between CEO pay and employee pay is also a concern, with the median CEO in the S&P 500 being paid 196 times as much as the median employee in 2023. Additionally, the number of job openings in the US shrank for the second month in a row, setting a new three-year low, indicating a cooling labor market and a potential slowdown in the broader economy.
However, a study by the Federal Reserve Bank of San Francisco reveals that private companies have become over 50% more profitable than publicly traded firms since the late 1970s. Factors contributing to this include reduced competition, higher risk tolerance, and fewer federal regulations [aa5497e4]. Private companies have the flexibility to pursue riskier investments or strategies, potentially yielding higher returns. The study used data from the Compustat database and the Integrated Macroeconomic Accounts to analyze publicly traded U.S. companies. The findings highlight the growing profitability of private firms and caution against using the stock market as a representation of the overall economy.
The concentration of the US stock market is not necessarily a cause for concern. The top 10 stocks now account for a record 35% of the US market cap, the highest level ever. A deep-dive analysis by Michael J. Mauboussin and Dan Callahan at Morgan Stanley Investment Management finds that Wall Street's current dynamics are not without precedent, and average returns tend to be higher when concentration is rising. The ongoing tech-led boom is supported by strong fundamentals. While the concentration of wealth, earnings, and market cap in the hands of a few stocks is unprecedented, increased concentration appears to be a feature of the US stock market. A study by Hendrik Bessembinder at Arizona State University shows that investments in publicly listed US stocks have enhanced shareholder wealth by more than $55 trillion from 1926 to 2022, even as investments in more than half of individual stocks reduced shareholder wealth. The top 11 firms account for slightly over 20% of net shareholder wealth creation, and the number of companies that account for half of total net wealth creation has decreased over time [bcdb9522] [d2df5dc7].
The Federal Reserve's decision to maintain high interest rates throughout 2024 has raised questions about its impact on the economy. Federal Reserve Chair is scheduled to testify before the Senate Banking Committee on July 9 to discuss interest-rate policy and the state of the banking system [aa5497e4].
