The decade of shrinking global stock markets is finally over

Thanks to record issuance, the SPAC boom and the pandemic-fueled collapse in buybacks, the supply of equities across the developed world has turned positive for the first time in a decade, according to Sanford C. Bernstein. At $273 billion in the 12 months through the end of March, the hand-wringing over the de-equitization trends of the post-financial crisis era is well and truly over.

What started as a rush to shore up balance sheets during the Covid crisis has morphed into a spree of deals to tap relentless investor appetite for a market defying historic valuations. From Coinbase Global Inc. and Deliveroo Plc to celebrity blank-check firms, initial and secondary offerings jumped to a record $208 billion in the 13 weeks to April 9, Ned Davis Research data show.

It’s the latest sign of market mania on Wall Street.

“Typically, equity issuance peaks at the end of the cycle at the same time that investor sentiment gets stretched,” said Emily Roland, co-chief investment strategist at John Hancock Investment Management. “The rapid rise in net equity issuance is another sign to us that this market cycle is happening at warp speed.”

All this is a big reversal from the pre-pandemic era, when the number of stocks dropped year-on-year and staying-private was in vogue.

That spurred fears the public market was losing its appeal as a pricing mechanism and gateway to raise capital — not to mention angst that Main Street was missing out on the spoils of American capitalism.

The question now: Will money managers gobble up supply, or will corporate buybacks pick up the slack to fuel markets at records?

On the latter, there’s good news for bulls with Alphabet Inc. and Apple Inc. pledging to repurchase shares after blockbuster earnings. American companies last quarter announced $339 billion of repurchases, a 68% rise from the depths of the pandemic selloff a year ago, though still short of $569 billion during the 2018 heyday, according to EPFR Global Inc. data.

Now, European companies, which have traditionally preferred paying dividends, may be on the brink of a buyback wave, according to Morgan Stanley and Societe Generale SA.

Fueled by merger activity, the private equity boom and American firms buying back shares en masse, the shortage of stocks in the pre-virus days helped juice the bull market. It got extreme: In November 2018, supply collapsed by almost $1 trillion, Bernstein data show.

In the past the brokerage has compiled the data to clients as a warning that rising supply leads to lower future returns. This time round, things may be different.

“One can add on high valuations and several months of record inflows as a series of potentially negative signals,” said strategist Inigo Fraser Jenkins. “But I still think it is right to have a positive equity view as there is a good case that real rates will stay lower for longer, and asset owners are likely going to be forced into buying more equities.”

With returns diminishing across the fixed-income world, equities are increasingly seen as the only game in town. After a boom in retail speculation over the past year, the $600 billion of inflows into global stocks over the past five months have exceeded the entire total of the prior 12 years, according to Bank of America Corp.

And there are no obvious signs demand will crumble anytime soon.

While the global economy is only just emerging from the 2020 doom and gloom, a listing spree and elevated valuations are typically symptoms of greed in the dying stages of the business cycle. For some, it’s a signal the stock party is looking crowded. Since surging 119% in a year to a record in February, an exchange-traded fund that tracks IPOs has dropped more than 15%.

Still, there are no tried-and-tested ways to trade a Covid cycle that keeps booming on massive policy stimulus.

“Interest in general for equity has been very, very high compared to the last one or two years,” said Katy Kaminski, chief research strategist at quant firm AlphaSimplex Group LLC. “A lot of people think it’s a reasonable time to issue those shares, so it can go on for quite a long time until you have some kind of disruptive event.”