Initial public offerings (IPOs) are going great guns this fall, smashing records as investors see incredible gains and anticipate more to come.
Why is this happening now, in this most unusual and economically challenging year?
There are several reasons. The Federal Reserve’s immense capital injections go a long way in explaining why the markets are hitting record highs as the U.S. economy continues its struggle to regain its feet. And typically, a bullish stock market leads to a hot IPO market.
That explains a lot, but not everything. There are other key factors as well.
One of those factors is pent-up demand. The IPO market hasn’t performed this well in at least five years. Investors want, and almost demand, the kind of gains they realized from Tesla, whose stock price saw a rise of more than 500 percent from March to August, and is expected to double in price with its new battery reveal on Sept. 22.
The IPO market is flush with money and is hungry for new opportunities. In fact, according to Renaissance Capital, more than 100 companies have already raised nearly $40 billion in 2020. For comparison, when Alibaba went public in 2014, $85 billion was raised the entire year.
Some of this year’s market performance can be attributed to the fact that many in the investment community anticipate that the worst of the pandemic and the resultant lockdowns are behind us. That, in itself, adds to market optimism.
What’s more, that performance is even greater than many realize. That’s because this very hot IPO market performance does not include the extremely active special purpose acquisition companies (SPAC) market.
The SPAC market is the biggest in history, with 97 IPOs and another 39 having filed to IPO soon. The gross dollar amount has already passed $38 billion, eclipsing the record set in 2019 of $13.6 billion.
When you think about it, stockholders who’ve made a killing in the market over the past several years have to put their money somewhere, don’t they?
What better place than the next big tech or other high-growth IPO?
And, by the way, that’s tens of billions of dollars looking for a new place to land. This big money comes from pension funds, hedge funds, private investment groups, sovereign wealth funds, and other sources of big money.
Then, of course, the time of year matters, too. September and October are usually the most active months for IPOs. The paradox of this fact ought not be lost here, because just as those two months are known for the greatest successes in the IPO market, they’re also notorious times of market failures and steep economic downturns.
Right now, both are happening at the same time. Of course, that may seem contradictory, and it is. Consider, for instance, the fact that the U.S. economy has shrunk 32.9 percent over the past year, or that the unemployment rate is greater than that of the Great Depression.
From that perspective, it would appear that the markets are becoming increasingly the province of the elite, doesn’t it?
It looks that way, and for good reason.
The banking, Wall Street, and offshore financial elite have been the least affected by the impact of the lockdown and the economic downturn from it. This isn’t a political or class warfare argument, but rather, is an acknowledgment of the close and crucial relationship between Washington and Wall Street, between political power and financial power.
That only underscores the reality, as I pointed out in a recent article, that equity markets aren’t markets as much as they are instruments of financial policy, as well as for U.S. domestic and foreign investors’ advantage.
But do working Americans also benefit?
Of course, they do; at least those with money in the stock market.
This dual reality of feast and famine in the U.S. economy will continue on, at least for the time being. A remarkable string of successes in the stock market and IPOs only builds even more momentum, attracting more investor capital.
A brief sample of recent IPOs by CNBC tells the story: Vroom is up 235 percent, Zoom Info has risen 83 percent, Rocket Companies is up 87 percent, Li Auto is up 54 percent, and Jamf is up 47 percent. Compared to bond and bank account yields, these potent returns are just too tempting for investors around the world to pass up.
On the flip side, it bears keeping in mind that, underneath it all, these market successes are also being driven by trillions of dollars of debt. Furthermore, even as the pandemic continues and another round of lockdowns looms, the issuing of debt shows no sign of easing, especially with interest rates, which are really just the cost of money, continuing to be at historic lows.
There is, however, a limit to everything. That includes the ability of markets and the willingness of creditors to accept historically unprecedented levels of debt issuance by the Federal Reserve, as well as the ability of the U.S. government to service that debt.
That, too, bears keeping in mind.
James R. Gorrie is the author of “The China Crisis” (Wiley, 2013) and writes on his blog, TheBananaRepublican.com. He is based in Southern California.
Views expressed in this article are the opinions of the author and do not necessarily reflect the views of The Epoch Times.