• Market Crumbs

It's Becoming Easier To Invest, But Why Did It Take So Long?

Image via Know Your Meme

Investing in the stock market has long been subject to views such as the odds are against retail investors, it's tilted to favor a select few, it's rigged, etc. While buying an index fund and not paying attention to it has been a successful strategy over the long run, there have been countless times when uninformed people were sucked into the market at the wrong time. 

As Market Crumbs wrote yesterday, it's now been well over ten years since the infamous 666 bottom on the S&P 500 on March 6, 2009. Since then, the S&P 500 has had a remarkable run of nearly 400% to its current level just under 3,200. The move equates to a 10-year annualized return of 17.8%.

While loose monetary policy across the globe and record share buybacks could easily continue to fuel the market higher, the odds of the market having a similar run over the next ten years is highly unlikely. With that being said, three developments have happened over the last few months that make you wonder why now?

First, in September, Interactive Brokers eliminated commissions on stock and ETF trades. The move kicked off a domino effect, which saw virtually every major brokerage—Charles Schwab, TD Ameritrade, E-Trade, Ally Invest and Fidelity, eliminate commissions as well. The moves were generally defended as an attempt to draw assets, make investing easier or keep pace with Robinhood, the fintech startup that first offered commission free trading to attract millennials.

The firm's "passion has been to make investing easier and more affordable for everyone," said Charles Schwab founder Charles Schwab at the time. The only question is why did Schwab, as well as all of the other brokers, wait until 2019 to make this move? If they were passionate about "making investing easier" for everyone why didn't they do so earlier in this bull market? If it was to keep pace with Robinhood, they could've done so in 2015 when it launched.

The second development which raised eyebrows was the move by a handful of brokers to offer fractional share trading. For example, if you can't afford a share of Apple at nearly $280.00, you can now buy one-fifth of a share for $56.00. Schwab, Robinhood and Interactive Brokers are all offering the fractional share trading option. Once again, Schwab cited that it is "focused on younger customers" as its motive for the move.

Lastly, just yesterday, the U.S. Securities and Exchange Commission voted to propose amendments to the definition of accredited investor. The move "seeks to update and improve the definition to more effectively identify institutional and individual investors that have the knowledge and expertise to participate in our private capital markets." To wit, the "proposed amendments would allow more investors to participate in private offerings."

Of course the SEC waited until this year, which has seen some of the most high profile IPO failures of all time, to determine they want to make it easier to invest in private capital markets. While the returns of just about every publicly traded corporation have been exceptional for the last decade, most of them pale in comparison to the returns VCs have experienced by investing in the countless startups that have gone on to become unicorns and ultimately, IPO.

Lowering the bar for investors to invest through commission-free trading, fractional shares and looser restrictions on private investments is not necessarily a bad thing. The issue is the reasons they give such as wanting to entice younger investors and "making investing easier" are undoubtedly questionable more than ten years into this bull market. After all, insiders who are selling at the fastest pace in two decades need someone to sell to as buybacks dry up. As one Twitter user perfectly said, "Unloading stocks on the public at the highs is a process, not an event."

Leftover Crumbs

  • Will the Fed use it as an excuse to cut rates or start QE? Following Boeing's decision to halt production on the troubled 737 MAX, analysts have started to weigh in on the implications of the move. An analyst at JPMorgan believes Boeing will still burn more than $1 billion per month during the halt. The implications are much broader, though, with analysts throughout Wall Street saying the halt is likely to negatively affect U.S. GDP. "It probably will show up in GDP in Q1," said Mark Zandi, chief economist at Moody’s Analytics. "Manufacturing is already in recession, so this will just ensure that it stays in recession, at least in early 2020." With roughly 600 companies in the supply chain for the 737 MAX, the extent of the implications remains to be seen. 

  • Is it different this time? Fannie Mae has revised its 2020 forecast for the U.S. housing market significantly higher. As a result of a strong labor market, strong consumer spending and low mortgage rates, Fannie Mae believes growth in single-family housing starts will jump to 10% next year and exceed 1 million new homes in 2021. For context, growth in single-family housing starts was just 1% this year. 2005 saw a record 1.7 million single-family housing starts, while the late 90s saw a 1.2 million annual pace. 

  • It's a done deal. PSA Group and Fiat Chrysler Automobiles NV have agreed on a merger of equals that will create the world’s fourth-largest automaker. This marks the largest deal in the auto industry since Daimler acquired Chrysler in 1998. PSA CEO Carlos Tavares will run the combined company as CEO, with Fiat Chairman John Elkann holding his position as Chairman. The deal, which is expected to generate nearly €4 billion annually in synergies, is expected to close within 15 months, pending approvals by shareholders and regulators.

  • They don't like being third. Google management wants its cloud computing business to pull ahead of market share leaders Amazon or Microsoft, preferably both, by 2023. The goal was reportedly formulated last year by Google CEO Sundar Pichai, Alphabet CFO Ruth Porat and former-CEO of Alphabet Larry Page. Larry Page supposedly felt that third place was unacceptable and debated exiting the business altogether. If Google fails to make progress by 2023, they could exit the cloud computing market. 

  • Too many unicorns? 2019 has seen a record number of new unicorns, which is a popular term for startups valued at more than $1 billion. 66 VC-backed startups earned the nickname in the U.S. so far this year compared to 58 in 2018, according CB Insights. "I think there’s too much money and multiples have gotten out of whack," said Aileen Lee, who came up with the term. When Lee coined the term in 2013, there had only been 39 unicorns created over the prior ten years going back to 2003.