Most of the time when we worry about a correction (or worse) that might prick a stock price bubble, our concerns focus on the demand side. Will investors continue to buy shares even as prices go up? Is there enough money on the sidelines to fuel buying? Do low interest rates and low bond yields create enough demand for stocks?
Seldom do we worry about supply issues that might let the air out of stock prices. That’s because in most years  companies buy back more shares than they sell. That creates a steady upward bias to stock prices simply because there are fewer shares to buy. On average over the last decade companies bought back $3 in stock for every dollar they raised.
Not in 2020. For the first time since the global financial crisis year of 2009, companies will issue as much stock as they sell. Bloomberg reports that companies have announced plans to raise about $510 billion via initial and secondary share offerings in 2020, up 50% from last year, according to data compiled by EPFR, a unit of Informa Financial Intelligence.
IPOs.SPACs. Secondary offerings. Everybody from Snowflake to Tesla to American Airlines is bringing stock to the market.
And that does raise the question of whether investors and traders have enough cash–and enough appetite–to absorb this flood of new shares.
So far that appetite remains undiminished.
As I wrote in Signs of a market top Part 1, investors and traders are bidding up prices of newly public companies to huge next day gains. First day rallies of initial public offerings have been three times larger than the average of the last 40 years. Among some 50 companies that had been backed by private equity and went public this year, their total worth jumped 660% on the first day of trading from levels indicated in their latest round of private funding, according to data compiled by PrivCo and Bloomberg. Companies like Tesla (TSLA) have been selling billions in new shares and seeing almost no pause in the upward trend of their share price.  Tesla sold $2 billion in stock in February. $5 billion more in September. And $5 billion last week. Investors and traders rushed to snap up the new shares. If you look carefully, you might be able to see a day or two of “sideways” in Tesla’s chart. Nothing more.
Which doesn’t mean, however, that this huge increase in the available supply of shares won’t have an effect down the road. Investors and traders can start to feel that their portfolios are stuffed so full of shares that they don’t have the cash to buy more or decide that their allocation to stocks is too heavy. Investors who bought some of new supply might stop to ask if they want to buy more at even higher prices. Traders who bought on strong upward momentum might decide to trim positions if that momentum falters.
At the least, it suggests that this market is very, very dependent on cash flows into equities. Those strong flows, I’ve argued, are likely to continue through mid-January or so as individuals and money managers put end of the year contributions to work. After that, without the big seasonal cash flows, digesting so much supply might start to be more difficult.
First signs of trouble would be in IPOs or secondary offers that don’t sell for as much as the sponsors hoped or that don’t yield the huge next day bonanza of recent 2020 IPOs. Big trouble if some company pulls an IPO or secondary offer on price. Or if shares of an IPO actually fall after the first public trade.
Then, I think, we might get a general deflation of the current level of stock prices. Not in a big pop necessarily. But a general deflation of the balloon.
