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Pro Analysis

Market shrinkage: Fewest US stocks since 1984

The New York Stock Exchange (NYSE) is reflected in a mirror in New York.
Michael Nagle | Bloomberg | Getty Images
The New York Stock Exchange (NYSE) is reflected in a mirror in New York.

A report Thursday from longtime Jefferies equity strategist Steven DeSanctis contained a really interesting statistic: The number of common stocks traded on major U.S. exchanges are the fewest in three decades.

"Currently, there are just 3,267 stocks in the University of Chicago's CRSP data, and this is the lowest since 1984," wrote DeSanctis.


What's behind this phenomenon? DeSanctis explains:

"Between the lack of IPO activity, the pickup of M&A, and buybacks, the U.S. equity world is becoming smaller and smaller, and this could be one of many reasons why active managers are lagging behind their indexes. Companies may not want to come public due to the additional cost of Sarbanes-Oxley or the fact that the private market has become a bigger source of financing than it has been in the past."

So whether it's the total number of stocks or the amount of shares for each company outstanding, the stock market is shrinking. This would appear to be good for passive investing as greater demand chasing less supply is lifting the market as a whole.

But it's likely negative for active managers, said DeSanctis.

"We think this has real implications for active managers, as it seems investors are crowding into fewer names and trading volume has fallen, making it much more difficult to add or reduce positions," he said.

For the curious, DeSanctis shows the number of common stocks is half as many as 1997's peak of 6,364.

The strategist also notes that 33 percent of small-cap stocks (his focus of expertise) reduced their shares outstanding in the last year, far above the historical average of about 20 percent.

So how should investors play this shrinking market?

DeSanctis notes historically it has paid to buy stocks that are reducing their share count. Right now, he believes the best strategy is to buy stocks that are doing that, but also paying a dividend.