Wallstreet
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Inventor Wayne Szalinski (Rick Moranis) debuted his electromagnetic shrink machine in the 1989 Disney film Honey, I Shrunk the Kids. Due to a mishap, his contraption shrinks his two kids and his neighbor's two kids to a quarter-inch tall. Once Szalinski realizes the miniature kids are fighting for their lives in his own backyard, he utters:
"I'll tell you at their size, that backyard is like 10 miles. Giant blades of grass, huge insects; it's a jungle out there!"
In the investment jungle, a similar shrinkage has occurred in the number of U.S. stocks. However, it's been more of a gradual contraction in this case ...
In 1983, there were 12,075 U.S. public companies.
In 1996, there were 8,090 U.S. public companies.
In 2007, there were 5,109 U.S. public companies.
Last year, there were 4,331 U.S. public companies.
In the last two decades, we've lost almost 3,800 companies. (Nearly 50%!)

Chart
© World BankTotal listed Domestic Companies
For example, take the Wilshire 5000 Total Market Index. It's the oldest measure of the entire U.S. stock market. The index contained 5,000 stocks at its creation in 1974. It grew to a high count of 7,562 constituents in 1998. Today, it has fewer than 3,600 names.

With no mad scientist and shrink-ray gun to blame, what's the cause?

The root cause is twofold. But, the real answers lie below the surface...
  • Fewer new listings. A lot of companies that would normally go public ... are not going public. According to FactSet, the number of IPOs in 2016 hit its lowest annual count (106 IPOs) since 2009 (64 IPOs). Companies are staying private because it's more efficient. As private companies, they don't have to deal with rising costs associated with being a public company. While larger, established companies can deal with regulatory burdens (e.g., armies of lawyers and accountants), it's easier and more cost-effective for smaller companies to just stay private. The growth of private equity businesses helped, too. Larger pools of institutional money have been flowing to the private equity and venture capital space for years. The attraction is the potential for higher returns and added diversification.
  • More delistings. Public companies are even calling it quits and going private. (Think Dell Computer, H.J. Heinz and PetSmart.) In many cases, activist investors are leading the charge. Failures and bankruptcies. Some companies just can't make it as public companies and they go out of business. Two big bear markets (2000 dot-com crash and 2008 financial crisis) have led to public stock disappearance. M&A activity has contributed as well. While deal activity has its ebbs and flows, total U.S. deal activity hasn't dipped below $700 billion in any of the last 10 calendar years. With a low cost of capital, plenty of cash on corporate balance sheets and a low-growth environment, it's hard to believe M&A activity will dry up anytime soon.
While there have been advantages and disadvantages for companies along the way, the shrinking stock market has rewarded investors.

Of course, central banks have contributed. With low rates and a lack of decent alternatives, investors have been forced into riskier assets - aka, the stock market. And those investors - and their increasing investment dollars - have been buying from a smaller pool of publicly traded stocks. It's simple supply and demand.

In other words ... more money is chasing fewer names.

The U.S. stock market was worth $27.4 trillion as of Dec. 31, 2016. That's up more than $10 trillion from 2010. And since 1996, the Wilshire 5000 Total Market Index is up 400% (including a couple bear markets).

This trend isn't set to reverse either ... Global consulting firm McKinsey projects 75% of S&P 500 companies will disappear over the next decade.

There are two simple ways to play the continuation of this trend ...
  1. Stay in the stock market. If the number of U.S. stocks continues to shrink, that could help support higher stock prices.
  2. Dip your toe into private equity. About 5% of companies in the U.S. are public. The other 95% are private. In the past, directly investing in private equity was off-limits for 98% of America. But, recent SEC approvals now make direct access available for everyone. For instance, equity crowdfunding platforms Indiegogo and SeedInvest allow "non-accredited" investors the opportunity to invest in startups and small businesses with as little as $100 and $500, respectively. You can also use traditional routes for indirect access. But, big management and performance fees typically apply. For example, there are publicly traded private equity firms, such as Apollo Global Management LLC (APO), Blackstone Group L.P. (BX), KKR & Co. L.P. (KKR) and The Carlyle Group L.P. (CG). And ETFs like PowerShares Global Listed Private Equity Portfolio (PSP) and ProShares Global Listed Private Equity (PEX).
Ultimately, the yet-to-be-made sequel "Honey, I Shrunk the Stock Market" could continue to be a good thing for investors in U.S. public and private companies.