Weekly Comment - October 28, 2019

Oct 28, 2019 | Nick Foglietta


If you add up the total annual amounts of corporate buybacks since 2013, you end up at a number over $5 Trillion

Investment Flows vs Stock Buybacks

There is a chart floating around the Twittersphere that way too many BEARISH leaning investors are pointing to with reckless abandon as to why stock markets are going to be challenged in the future.

The chart is true, but omits an incredibly important piece of information.

This week’s comment will look at the circulating chart, add the important information…and then add some more recent information that makes the entire discussion more interesting.

Let’s start with the chart that is initiating these conversations.

The black line shows the S&P 500 and the blue line shows cumulative US stock flows. Stock flows refer to the net positive or negative amount of US stock purchases.

The reason BEARISH investors are making such a stink about this chart is that it begs the question: How in the world is the US stock market continuing its upward trend when there is less and less money being invested in it?

Fair question, but the answer is really simple.

The graphic above shows the cumulative annual dollar amounts of corporate share buybacks for the S&P 500.

Let me save you some time; if you add up the total annual amounts of corporate buybacks since 2013, you end up at a number over $5 Trillion. It is also worth noting that 2018 and 2019, have seen the highest cumulative levels of stock buybacks since 2013.

Therefore, the buybacks have made up the net difference in organic buying to support stock prices in the S&P 500 and why they have been so important to the structure of the present BULL market.

OK, great. I believe that is pretty easy to understand.

The logical thing to watch for is to see if the stock buyback behaviour begins to change. At this point, there is only anecdotal evidence as to changing buyback behaviour in the last quarter.

Goldman Sachs issued the following bullet points on October 21st:

  • Buyback spending slowed 18% to $161 Billion in the second quarter of 2019 from second quarter 2018.
  • Year over year rate of buybacks are down 6% through August.
  • Corporate investors are shifting to dividend paying investments instead of growth oriented investments.

Is that a large change in buyback behaviour?

No, not really. Especially since 2018 was a record year by a wide margin. But the appetite of investors shifting back to value names is a big deal when coupled with the buyback behavior.

I will keep a sharp eye out for more news.

Dow Industrials 650,000 in 50 years

How does that headline make you feel when you read it?

Do you just want to buy the Dow and never look at your investments for the rest of your life? Does it make you nervous about the amount of currency devaluation and inflation that would be required to make this true? What would the average price of a house in Canada be if the Dow was at 650,000? Or liter of gas, or loaf of bread?

Maybe another question would be: How many times would an investor suffer a 50% loss on the road to this incredible number?

Let me ask you the real question I had when I read this headline: Why am I reading this now?

The economic cycle is running into the late innings. As shown above, earnings have been flat without the help of $5 trillion worth of corporate stock buybacks.

Why would a billionaire come out and make the claim that the Dow Industrial Average will be 650,000 in 50 years right now?

For the record. I believe the statement could easily be true, but I also believe there would be multiple 50% declines in the same Dow average on the road to 650,000.

The cardinal rule of successful investing is “know thyself honestly and thoroughly, then act accordingly.”

Part of our job as financial advisors is to help you do a good job of personalizing the cardinal rule of successful investing. Don’t be afraid to ask for help…

Feel free to write back with any thoughts or questions you might have.

Now For Something Completely Different

With apologies to the great Monty Python skits of the years, I want to post a final graphic for your thoughts.

Think about what an amazing turnaround in how our society functions is encapsulated in this graphic.

Do you think all three sections of the comment are connected? I do.