Beyond Meat President, Ethan Brown (C), celebrates with his guests after ringing the opening bell of the Nasdaq MarketSite on May 2, 2019 in New York.
Drew Angerer | Getty Images
The brisk market of new publicly traded companies in 2019, such as Beyond Meat and Chewy, could be bad news for the stock market in general over the next year.
A slight rise in IPO activity is correlated with a decline in S & P 500 index returns over the next 12 months, Bernstein equity strategist Noah Weisberger said on Monday. in a note. Indeed, companies that want to go public tend to wait to take advantage of what they perceive as the richest valuations of the market. At levels close to those of investors, many investors believe the market is overvalued, explained the equity strategist.
It's also because of "the idea that it's hard for the market to digest the incremental IPO offering, thereby eliminating term returns," he said. writes Weisberger. "The IPO is (slightly) cyclical, with management teams taking advantage of the opportunity to make themselves known while being supported by favorable economic conditions."
"It is worth noting that the economic expansion initiated at the end of 2016 has not been accompanied by a resumption of IPO activity before the start of 2019, which which suggests that this current wave of IPOs could simply catch up with growth, "he added.
As illustrated by Bernstein's graph below, the activity related to IPOs is more negative because of the future returns of the S & P 500. The increase in the number of introductions stock market over the past 12 months tends to be an indicator of future market losses.
"Said differently," said Weisberger. "The activity of IPOs is ahead and negatively correlated to market returns" with a value of -0.3.
A recent wave of IPOs has stormed Wall Street, with names such as Beyond Meat, online restaurant company, Chewy and the Crowdstrike cybersecurity group, up 163%, respectively. % and 70% during the first day of trading.
The Renaissance Capital IPO ETF, a basket of some 60 major IPOs, has grown by 35% this year, more than double that of the S & P 500.
"Going back to the mid-1980s, the IPO activity has clearly evolved." Although the late '90s occupies a special place in the history of the market, the business IPO has been disproportionate all decade and peaked in early 2000, "wrote Weisberger.
But, while the meteoric rise in stocks representing Fido's meatless burgers and squeaky toys has enriched a number of insightful insiders and investors, some are a little more worried. Many of the so-called unicorns on the stock market are relying on expectations of their rapid growth for their high valuations, a bet that could turn against the market if there is concern.
Today's IPOs are essentially "a very brilliant crowd of private investors who are desperately trying to win an end-of-the-cycle bid after missing that T4 bid and have considered the draw for a draw of 20% on the US stock market, "said Larry McDonald's Bear Traps report to CNBC. March.
"They should have done these transactions all last year and they deferred," he added at the time, noting that the US Federal Reserve then rushed to save the day by signaling a pause in its cycle of rate hikes. But this insurance may not always be there.
Economists and investors are gearing up for the announcement of the Fed's next decision later in the week, eager to see if the central bank is telegraphing a rate cut as economic data weakens in the world. Some recession indicators, such as the partial reversal of the yield curve, have also triggered market angst and spurred some to invest more in safer assets, such as bonds and gold.
"The relationship between the IPO activity and the futures returns was particularly marked in the dot-com bubble and again in mid-2014," Weisberger added. "It is interesting to note that the activity of IPOs has not increased so dramatically in the run-up to the global financial crisis, although some notable transactions, such as l & # 39; 39; IPO of Blackstone, have actually occurred at that time. "