Public Markets at Risk of Shrinking Further, Says Jamie Dimon

The banking chief decried shrinking public markets, investor activism and other risks to investment markets in JPMorgan Chase’s annual CEO letter



In 1996, the number of public U.S. companies peaked at 7,300. Today, that number stands at 4,300. In roughly the same period, the number of private companies backed by private equity increased from 1,900 to 11,200. 

The total number of public U.S. companies over the past two decades “should have grown dramatically, not shrunk,” Jamie Dimon, CEO of J.P. Morgan Chase & Co, wrote in his annual shareholder letter, released on Monday.

The main theme of Dimon’s letter was that the U.S. is facing an uncertain geopolitical situation. Unrest is rising across the world, and the U.S. faces a challenge to its global leadership. While Dimon noted that the economy is resilient, and that Americans are expecting a soft landing, some risks remain. 

Dimon noted that the U.S. economy is largely being driven by deficit spending and past stimulus. The need for significant investments in the energy transition and a restructured supply chain to service the energy transition could keep inflation and rates higher.

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Dimon also wrote that the U.S. has never experienced this level of Quantitative tightening, which he writes is draining $900 million in liquidity from the system annually, of which Americans have never experienced the full effect of.

Nonetheless, it was a good year for JPMorgan, the firm recorded record revenues for the sixth year in a row. The bank posted revenues of $162.4 billion and net income of $49.6 billion.

Dimon thinks several factors are forcing public companies to go private or stay private, including governance issues, regulations, the focus on quarterly earnings, and shareholder activism.

There are good reasons for private markets, and some good outcomes result from them. For example, companies can stay private longer if they wish and raise more and different types of capital without going to the public markets. However, taking a wider view, I fear we may be driving companies from the public markets,” Dimon wrote.

Dimon asked, “Is this the outcome we want?”

Pressure for Quarterly Earnings 

Dimon warned that the pressure on companies to produce and focus on quarterly earnings can lead to bad decisions, and bad accounting. While Dimon wrote that detailed and disciplined quarterly reporting is positive, CEOs and company boards should resist the “undue pressure of quarterly earnings.”

Often, companies will take short-term measures to improve their earnings, like cutting costs at quarter end, or halting investments that although they may reap rewards in the long term, would show accounting losses in the near term. 

“Once shortcuts like this begin, people all over the company understand that it is okay to ‘stretch’ to meet your numbers,” Dimon wrote. “This could put you on a treadmill to ruin. Obviously, a company should not resort to these tactics, but it does happen in the public markets — and it’s probably less likely in the private markets.”

Shareholder Activism and Proxy Advisory 

Dimon’s greatest criticism targeted shareholder activism. “One of the reasons it is less desirable to be a public company is because of the spiraling frivolousness of the annual shareholder meeting,” he wrote. 

Dimon denounced what he called the “undue influences” proxy advisors have on institutional investors, which could be at odds with their fiduciary responsibilities.  

Dimon also criticized those in investing roles at institutions for not having as large of a role in shareholder proposals. He criticized the role of stewardship committees, groups at many firms which vote on and review shareholder proposals. According to Dimon, most of these committees are not made up of portfolio managers and research analysts, but stewardship experts. 

“The reality is that many of these committees default large portions of what they do to proxy advisors and, more troubling, make it harder for actual portfolio managers to override this decision making,” Dimon wrote. 

“Some have argued that it’s too hard and too expensive to review the large number of proxies and proxy proposals — this is both lazy and wrong. If issues are important to a company, they should be important to the shareholder — for the most part, only a handful of proposals are important to companies,” Dimon continued.

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Ned Davis Snubs Cash Investing, Lauds Stocks and Gold

Research firm overweights equities and bullion, amid pending rate drop.

 

Not long ago, the saying was: “Cash is trash,” because money market funds and other cash-centric investments paid near zero. In March 2022, though, the Federal Reserve began raising short-term rates, and now numerous cash vehicles pay more than 5%. But with the Fed’s announced intention to pare rates—its policymaking committee expects three quarter-point cuts this year—the recent excitement over cash has dulled.

 Ned Davis Research, in its just-released April overview, changed its recommended asset allocation to nothing for cash, down from 9% in March. The cash segment went to stocks, for a 70% allocation from 61% previously. Bonds remain at 30%, even though their prices could rally if the Fed does enact reductions in the fed funds rate.

At the same time, the firm strengthened its bullish outlook for gold. While Davis does not include gold or any other commodity in its allocation suggestions, it argued that bullion will continue to rise, meriting an overweight designation, along with stocks.

In the overview, Tim Hayes, Davis’ chief global investment strategist, advised investors to look for continued “gold and equity uptrends,” with both asset classes outpacing others in 2024. As of last Friday, gold was up 12.9% for the year and the S&P 500 had advanced 9.1%. For bonds, the Bloomberg U.S. Aggregate had lost 1.8%, most likely reflecting anxieties over a possible delay in Fed rate cuts.

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Hayes wrote that nowadays “equities and gold warrant heavy exposure. Bonds and cash do not.”

Things were a lot different two years ago, when the Fed commenced its tightening regimen, aimed at curbing burgeoning inflation. “For the first time since 2013 we had upgraded cash to overweight,” Hayes recalled in his April overview. Also in 2022, it underweighted stocks. In 2022, stocks, bonds and gold all lost value. Gold typically suffers when rates rise, as interest-bearing assets, such as bonds, appear relatively more attractive. Gold, of course, pays no interest or dividends.

Then in 2023, inflation’s rise abated, thus stocks and gold did well, and bonds nudged up slightly, into the black. “By April 2023, gold became the first asset to post a bigger one-year return than cash, and stocks followed later in the year,” Hayes wrote. The trend improved further in 2024. Lately, gold has seen a “golden cross,” where its 50-day moving price average surpassed its 200-day average, a bullish signal to quants, as it shows recent price gains have accelerated.

What could spoil Hayes’ rosy scenario for his overweighted stocks and gold? He indicated a possible continued rise in the benchmark 10-year Treasury’s yield, which as of Friday was around 4.4%, up from 3.8% at the start of the year. One much-discussed reason for that: fears that inflation’s ebbing might have stalled out. The Consumer Price Index for March, to be released Wednesday, could boost the “inflation stickiness” narrative.

Another potential problem for stocks and gold is that speculators could push those assets’ prices too high, resulting in a painful correction. But Hayes pointedly added that he sees no evidence of such frothiness.

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