Record levels of stock issuance by public companies over the past several weeks could come back to haunt the market and hurt investors, at least in the near term.
While the market rally from the March 9 low has started to level off, the impact from the record $64 billion in shares issued in May could linger for months, according to market analysts.
Historically, when the stock market experiences a one-month infusion of $30 billion or more in stock issuance, the Standard & Poor's 500 stock index declines by an average of 4% over the next 90 days.
“It is absolutely dilutive to shareholders,” said Steven Roge, a portfolio manager with R.W. Roge & Co. Inc., a Bohemia, N.Y.-based firm with $180 million under management.
“We saw the first couple of good months in the market in almost two years, and companies that were strapped for cash used the opportunity to raise money,” he said. “But as you increase the supply of stock, the intrinsic value of each share goes down.”
The May flood of stock issuance represented a 68% increase over the previous one-month record of $38 billion, set in May 2008, according to TrimTabs Investment Research in Sausalito, Calif.
In the 90 days following May 2008, the S&P fell by 8.4%.