Is the stock market dying or evolving?

We all know how the stock market is super-susceptible to rumors and speculation, but is a crash really on the horizon or is it merely fearmongering? The only way a crash can start is if market sentiment is strongly shifted to a negative, so let’s explore what we know so far and see if it is enough to sway sentiment.

What's happening right now?

Recent long-term developments in the stock market highlight several key trends and investment opportunities. The US presidential election cycle is expected to positively influence market dynamics, with historical patterns suggesting a continued bull market through the year. Experts recommend long-term investments in sectors such as infrastructure, defense, and renewable energy.

Rising earnings estimates and profit margins indicate a potential shift from a valuation-led to an earnings-led market phase, despite persistent high inflation and interest rates. Additionally, ongoing US economic policies and global trade relations, including negotiations with China, play a crucial role in shaping market sentiment​.

Noticeable declines worldwide

The decline is visible in key global markets, particularly in the US, Europe, and the UK, where the number of listed companies has dwindled over recent years. General trading knowledge suggests that stocks are an excellent indicator of a region’s financial strength, but that relationship seems far from the truth these days. We’ve seen Americans struggling with inflation and interest rates, all while the US stock market has been passing all-time highs. The German economy is also suffering, but the DE index is performing remarkably.

So what’s prompting the recent decline if not the economy?

In 1996, the US boasted over 8000 publicly traded stocks, but by 2022, this figure had fallen to 4,642.  Similarly, the UK has experienced a loss of 25% in the number of listed companies over the past decade, although Brexit is mostly responsible for that exodus.

This development has led to speculation that publicly traded equities might one day become an endangered asset class. Companies that were once publicly traded have been acquired by private equity firms, resulting in a smaller pool of publicly traded stocks.

Non-public companies are likely taking deals from private firms due to increasingly rigorous reporting requirements and regulatory scrutiny, making it less appealing for new firms to get listed on the stock exchange. Equity firms such as Blackrock, Vanguard, and State Street already control over $15 Trillion (USD) in assets, which equates to over a quarter of the S&P500 (US500).

Imagining the total privatization of global stocks isn’t much of a stretch for the imagination… although it won’t happen any time soon. 

The impact on traders

For traders, the decline in publicly traded companies presents both challenges and opportunities. With fewer publicly traded companies, price volatility could increase, necessitating new risk management strategies. 

Fast-growing economies like India continue to see record IPOs. Additionally, regions like the Middle East offer opportunities for diversification amid a resurgence in IPOs and investment activities.

What we might be seeing is a shift in the intensity of region-related trading volumes, possibly exacerbated by BRICS and other de-dollarizing initiatives. Well-established markets have high saturation and have done for decades, but emerging markets are often the place to see extremes such as extended rallies and rapid crashes.

Conclusion

While the stock market might seem to be in decline, these developments could be signaling nothing more than a transformative phase. For now, the stock market is alive and kicking, and despite the gradual shift towards private ownership, there are still opportunities for savvy traders to find attractive trades. 

Monitor Election-Year Trends: Historically, the fourth year of the U.S. presidential term has been strong for the stock market, especially following a down mid-term year. Consider positioning your portfolio to take advantage of potential bullish trends that may continue through the year​.

Focus on Recommended Long-Term Stocks: Ahead of the 2024 Lok Sabha elections, sectors like infrastructure, defense, power, and renewable energy are expected to perform well. Recommended stocks include Bharat Electronics Ltd (BEL), NTPC, Mahindra & Mahindra (M&M), and State Bank of India (SBI)​.

Leverage Earnings Growth: Rising earnings estimates and profit margins suggest a shift from a valuation-led to an earnings-led market phase. Look for companies with strong earnings growth potential to capitalize on this trend​ (Fidelity)​.

Stay Updated on Federal Reserve Policies: The Federal Reserve's approach to interest rates remains crucial. Keep an eye on announcements regarding rate cuts, which could support market growth. Adjust your strategies based on the Fed's monetary policy direction​.

Consider Global Economic Policies: U.S. economic policies, including tariffs and trade negotiations, impact market dynamics. Stay informed about developments in trade relations, particularly with major economies like China, as these can influence market sentiment and create trading opportunities.

Keep your finger on the pulse of the sentiment swarm and be ready to jump in, or get, out at a moment's notice. For convenience, the Exness Trade app is a wise choice, making it easy to check your portfolio no matter where you are.

So, while the narrative of a dying stock market may appear in the headlines, traders might prefer to consider it an evolution, which often brings new and untapped opportunities for those thinking outside of the box.

This is not investment advice. Past performance is not an indication of future results. Your capital is at risk, please trade responsibly.

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Author:

Paul Reid

Paul Reid is a financial journalist dedicated to uncovering hidden fundamental connections that can give traders an advantage. Focusing primarily on the stock market, Paul's instincts for identifying major company shifts is well established from following the financial markets for over a decade.