How Did the U.S. Stock Market Get So Old?

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Illustration: Woshibai for Bloomberg Businessweek

Certain adjectives come to mind in describing the U.S. stock market. Sprawling. Resilient. Diverse. Here’s another you probably haven’t thought of: old. Thanks to an absence of new entrants, the average age of companies listed on American exchanges has been steadily rising for three decades. Now it’s 20 years, almost twice the average in 1997, during the dot-com craze.

The market won’t be getting much younger this year. Six unicorn tech giants, including ride-sharing network Uber Technologies Inc. and online home-rental service Airbnb Inc., are preparing to go public at an average age that’s four years older than what was typical two decades ago.

Average Age of U.S.-Listed Stocks

In years

Data: Kathleen Kahle, University of Arizona

What happens when a population ages? In the stock market, opinions abound. Some say investors miss out. Fund managers find it harder to build portfolios that truly reflect what’s happening in the economy as new companies stay private. Another theory compares stocks to people and says both slow down and eschew risk. And while that notion seemed crazy amid December’s equity earthquake, a case can be made that a mature market is a less volatile one.

Aging implies durability. “That’s the key here: Older firms, larger firms, have a better track record because you became large,” says René Stulz, the Everett D. Reese Chair of Banking and Monetary Economics at Ohio State University. “You have more of a cushion against the impact of bad news. You might be diversified, you might be operating across different countries, different parts of the country. All of that merely tends towards having less volatility.”

The trend toward fewer and older companies has been developing for years. Firms are staying private for longer, and initial public offerings—once a rite of passage for a successful startup—get done later. Once companies do list, they quickly become prey. In a market dominated by megacaps, behemoths swallow up competitors with ease. “What’s happened in the last 20 years? It’s been essentially a dearth of IPOs and a continued drumbeat of mergers and acquisitions,” says Michael Mauboussin, director of research at BlueMountain Capital Management.

Initial Public Offerings Listed in the U.S.

Data: Dealogic

A continuing mystery for stock investors has been the almost unprecedented calm that has prevailed in markets for about five years, which is usually ascribed to central banks’ efforts to support steady growth after the financial crisis. The tie between old age and low volatility is unproven, but theorists such as Stulz say research exploring the connection is warranted. “When you think of volatility, there are two pieces to it,” he says. There’s certainly plenty of systemic, or marketwide, turbulence out there. That’s a function of lots of different companies moving in unison—say, when there’s news about trade tensions between the U.S. and China. But then there’s what’s known as idiosyncratic volatility, or the ups and downs that are particular to just one company. It’s become more rare for the average volatility of individual stocks in any given year to exceed 30 percent, Bloomberg data show. From the period of 1990 to 2003, that level generally defined the bottom of the range. “Firms that are older and larger have much less idiosyncratic volatility,” Stulz says.

Single-Stock Volatility

1-year average of S&P 500 stocks

Data: Compiled by Bloomberg

Conglomeration may be contributing to the decline in volatility, as companies themselves behave more like indexes of multiple stocks. Amazon.com Inc. isn’t just an online marketplace—it’s also a grocery chain, a cloud services company, and a media powerhouse. Walmart Inc. owns multiple brands, and Google parent Alphabet Inc. is way more than a search engine. “You have a bunch of individual companies, each have their expected return, each have their own volatility,” says Joe Mallen, chief investment officer at Helios Quantitative Research. “What happens when you aggregate those into one company? The expected return becomes the average of all of the parts, but the volatility decreases. You’re just building a portfolio.”

If you were trying to design a buyer optimized for today’s lumbering giants, you would come up with index-tracking products like exchange-traded funds. According to some analysts, it’s no surprise that as the number of companies shrank, the number of ETFs ballooned. What started in 1993 with SPY, the ETF that tracks the S&P 500, has grown into a nearly $4 trillion industry. Many retail and institutional investors just aren’t that interested in individual companies. Trading in ETFs makes up about a quarter of total U.S. trading volume each day, and some days that share can jump to 40 percent.

When people are focused on trading in and out of markets, not specific stocks, and when young companies are going through their growth mode outside public markets, “it does change things from a volatility perspective,” says Yousef Abbasi, director of U.S. institutional equities and global market strategist at INTL FCStone. It doesn’t necessarily make investing overall less risky—index ETFs fall hard when people get worried about the market writ large–but it may be making individual stockpicking more of a snooze.