This is Frightening: The Stock Market is Relying on Just This One Buyer to Hold it Together
Corporate buybacks are currently on track to surpass all-time records. When did this last occur? Right before the great recession…
From L Todd Wood, for Birch Gold Group
In spite of all the high-tech financial terms like high-frequency trading and dark pools, people forget that the stock market (in the United States, at least) is essentially that — a market. And, in a market, what moves the price of a product up or down? It’s simply supply and demand.
Yes, there are computers and traders trying their best to get the price they want — whether they are buying or selling — but legally, the market is supposed to set the price based on how many people want to buy and sell, and at what price.
With this in mind, it is a worthwhile exercise to look at who have been the buyers and who have been the sellers in these last few years of our aging bull market.
The main seller in this stage of the cycle has clearly been the retail investor, or in other words, the average American, the Mom and Pop investors.
The market volatility over the last several months has scared these Americans away in droves, as they’ve pulled over $40 billion from the market since this January alone.
The buyer, on the other hand, is corporate America. CFOs have practically been backing up the truck to buy back their own stock, and thus benefiting shareholders in the process.
What does that mean?
It means the guys handling the money at Fortune 500 companies believe that, instead of simply trying to make more money for the business, they can actually make more money for shareholders by making their stock scarcer.
Think about that; it’s a scary thought. Because, what happens when they run out of money in the treasury?
“Anytime when you’re relying solely on one thing to happen to keep the market going is a dangerous situation,” said Andrew Hopkins, director of equity research at Wilmington Trust Co., which oversees about $70 billion. “Over time, you come to the realization, ‘Look, these companies can’t grow. Borrowing money to buy back stocks is going to come to an end.'”
“Corporate buybacks are the sole demand for corporate equities in this market,” David Kostin, the chief U.S. equity strategist at Goldman Sachs Group Inc., said in a Feb. 23 Bloomberg Television interview. “It’s been a very challenging market this year in terms of some of the macro rotations, concerns about China and oil, which have encouraged fund managers to reduce their exposure.”
Obviously, this can’t go on forever. So, with corporate buybacks on track to surpass all-time records, it may be instructive to ask, When were they last at such lofty levels? Yes, you guessed it, it was at the start of the great recession in 2007.
The current gap between retail redemptions and corporate buying is the highest since 1998, at $225 billion. Because corporate buying has blackout periods to deal with due to regulation, these large buys tend to be concentrated at certain times of the month, thus amplifying volatility. All in, corporate buying since 2009 has come in at over $2 trillion.
Simply put, this corporate buying is not sustainable. At some point, the party will be over. The only question is, where will the average American be positioned at that point?
Will you jump in with both feet as the market moves higher on a corporate sugar high? Or, will you protect your savings by holding another asset class that may act as an insurance policy if we face a significant a market sell-off, like precious metals?
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