Ignore the Noise

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In his famous December 5, 1996 speech, former Federal Reserve Chairman Alan Greenspan stated,

“But how do we know when irrational excitement has unduly escalated asset values, which then become subject to unexpected and prolonged contractions as they have in Japan over the past decade? And how do we factor that assessment into monetary policy?”

The former Fed Chairman made this speech at the beginning of the 1990’s “dot.com bubble,” as psychological factors drove optimism in the US stock markets beyond their fundamental valuations.

Fast-forward to today, equity valuations in many sectors are at all-time highs as the combination of historically low interest rates and the possibility of life after COVID-19 have provided investors more reason to own equities. Also, Robinhood and social media platforms have given retail investors a voice and the ability to participate in the stock market with the professionals. Instead of debating if the efficient-market hypothesis is alive and well, we thought it would be best to concentrate our thoughts on what public companies should focus on during these times.

Business Fundamentals
Many systemic factors determine changes in stock prices, such as monetary policy, the economy, inflation, and socioeconomic conditions. While corporate management teams cannot control these dynamics, they should stay focused on their business in order to take advantage of certain economic conditions.

Keep Emotions in Check
Stocks go up and stocks go down. Over the long run, a stock should reflect the value of the underlying asset. Getting caught up in a stock price’s daily gyrations could distract management from focusing on executing its business plan.

Use the Exuberance
Historic valuations and trading volume can create an opportunity to raise equity capital. Stock dilution and pricing discounts are two reasons why some potential equity offerings are not completed. During times of high demand for equities, the potential for dilution and pricing discounts can be minimized.

Know the Large Shareholders
Investors look for winners and pile into strong performing mutual funds and ETFs, leading to a change of a company’s investor base. An example of this is the ARK Funds. In 2020, the ARK Genomic Revolution ETF (ARKG) started the year with approximately $480 million assets under management (AUM) and grew to $7.7 billion by December 31, 2021; its total return for the year was 181%. As of the end of January 2021, the ARKG ETF had over $11.0 billion AUM. This increase in AUM comes mostly from new investors jumping into the ETF, hoping to capture higher returns. With such large inflows, ARKG has become a significant shareholder of many companies. Corporate management teams should continuously be aware of who owns its stock and how they invest.

Gilmartin has guided many public companies through various cycles of the stock markets with much success. Keeping our clients informed on Wall Street’s many aspects allows them to focus on what is most vital for them—their business. Contact our team today for personalized stock market guidance.

Greg Chodaczek, Managing Director

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