What’s keeping this unpopular bull market alive? Corporate Stock Buybacks. :: Wamhoff Financial & Accounting

What’s keeping this unpopular bull market alive? Corporate Stock Buybacks.

The current seven-year bull market is the third longest in US Stock market history, and investors are beginning to get concerned. These concerns include contracting corporate earnings, slowing global economic growth, and ongoing uncertainty about the future of US interest rates. Kyle Jones, Financial Planner at Wamhoff Financial Planning & Accounting Services, takes a closer look at what Bloomberg is calling “the Most-Hated Bull Market” in history.

Why is this being called the Most-Hated Bull Market?

  • Current US stock market outflows are worse than during the Great Recession years of 2008-2009
  • Investors are pulling funds out of stocks at one of the fastest paces on record
  • Although they’re buying back a great deal of this stock, corporate profits are declining.

What is keeping stock prices elevated despite the record selling by investors?

  • S&P 500 Index companies have publically stated they intend to purchase $165 billion of stock in the first quarter of 2016, approaching a record reached in 2007
  • Yet according to Societe Generale, corporate stock buybacks are being paid for by corporations raising the debt in the corporate bond market.
  • Consequently, the last remaining buyer of US large-cap stocks are the corporations themselves. According to Bank of America, “corporate buybacks are the sole demand for corporate equities in this market.”
  • Yet if US corporate earnings continue to decline, B of A predicts that “no one” will be left to purchase US stocks.

Key Takeaways:

  • If the current pace of investor selling continues, the implied gap with corporate buybacks would be $225 billion, which is the widest gap in data going back to 1998
  • Future corporate buybacks are slowing as profits are projected to decline for the fourth consecutive quarter.
  • Corporate balance sheets show them leveraged (using debt, borrowing from capital, etc) at the highest level in a decade.
  • The strong selloff in US equities that occurred during January and February coincided with a time when many large US companies were forced to step away from corporate share buybacks due to regulations surrounding corporate earnings reports.