Large Number of IPOs in 2021 Signal a Stock Market Crash
3 January 22
2021 was a crazy year for investors. It seemed that you could make healthy returns on anything you dare to put your money on: small, medium, large cap stocks, crypto currencies, NFTs and everything in between. We have seen huge volatility in the market with prices jumping and falling more than 50% in a single day. S&P 500 rose by 26.89% in 2021 which is pretty much unheard of.
Not all is sunshine and roses though as such “super investors” like Warren Buffett and Michael Burry are warning the general public that a stock market crash is inevitable, with it being extremely overvalued. There were many signs of this throughout 2020 and 2021 like extremely high Price/Earnings ratios of most popular stocks and 6.8% inflation of the US dollar. Another big worry is the new type of private investor, who is fueled more by speculation and prospect of making a quick buck rather than classical value investing. But with that in mind, I would like to look into another signal which is a record number of IPOs in 2021.
What is an IPO?
IPO is short for initial public offering, where a private company decides to become public by dedicating a percentage of its shares for sale in the stock market. Most often companies do this to raise capital that they later reinvest back into the business to increase the rate of growth, acquire a company or anything in between.
What happened with IPOs in 2021?
We had such big names like Rivian, Robinhood, Coinbase, Roblox, Bumble, Udemy, and more all go public. In 2021 we saw 2,388 IPOs raising US$453.3b in proceeds, which is more than in 2019 and 2020 combined. You could say that this is a good thing, businesses are thriving but with the stock market as with everything – what goes up must come down.
Has this happened before?
Even if we look at recent history in 1999 and 2000, right before the tech-bubble burst we saw a huge number of IPOs. What happened before the global financial crisis of 2008? In 2004, 2005, 2006 and 2007 a record number of IPOs just before the market flipped on its head.
How does a high number of IPOs indicate an upcoming market crash?
Put yourself in the shoes of a large company. You want to go public right when the market is at the absolute peak. Why? You will have to sell less shares to raise a certain amount of money or if you plan to release a certain number of shares, you will raise more capital than usual. In a downward market – the opposite is true.
Do we know what is going to happen in the future?
Nobody knows what the market will do next. That’s the beauty of it, but we can make calculated decisions based on the many signals we see. And currently you would not be called mad if you dared to predict that the market is indeed going to start tanking soon.