Stocks: Supply and Demand

Fear and greed are not the only forces acting on stock prices. Since stocks are traded on markets, supply and demand also act.

A cynic might argue that supply is caused by fear, as people sell stocks now expecting them to go down later, and that demand is caused by greed, as people buy stocks expecting them to go up later. As usual, a cynic would have part of the story.

Here’s a warning about supply that has been issued many times in the last few years: as baby boomer reach or approach retirement, they will sell their stocks, thus flooding and crashing the market. And here’s a debate about this warning from the WSJ a couple of years ago.

On the other hand, there are forces acting to reduce the supply of stocks. The San Francisco Chronicle recently remarked on the incredible shrinking supply of tradable U.S. stocks. There’s been $300 billion shrinkage already this year, due to cash takeovers by private equity firms and to share buybacks by corporations. Honey, I Shrunk the Equity Supply, as Paul Kedrosky puts it.

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