For the past several years we have seen retail and institutional clients selling stocks in anticipation of a market correction, a correction that has yet to come. Even the “smart money” in hedge funds have reduced stock ownership.
We talk to doctors around the country and continue to hear a recurring theme; “This market cannot keep going up”. More and more of the doctors we talk with are shocked to see the stock market hitting all time highs month after month, year after year. They ask us how this could happen with everyone they know selling stocks. This letter will attempt to simplify and shed some light on a very complicated subject.
Much of this stock market rally has been fueled by corporate buybacks.
U.S. companies have been buying back shares at a fast pace in 2019; in fact, companies have been aggressively buying back stock for years, a factor that has contributed to the five-year-plus bull market. The S&P 500 Buyback Index, which tracks the 100 shares with the highest buy-back ratios, has nearly doubled since early 2008 versus a gain of 30% or so by the S&P 500 over the same stretch.
Low bond yields and low U.S. economic growth has created and ideal environment for corporate buybacks. According to a recent report from Goldman Sachs, S&P 500 firms are buying back over 3% of their market cap, or about twice the pace from the 1990s. About 80% of S&P 500 companies are buying back shares. In simple terms, as retail investors sell their stocks in anticipation of a correction the very corporations they are selling are stepping in and buying up their stocks. This in turn causes stock prices to go up further frustrating the investors who just sold.
U.S. Federal Reserve
As long as the U.S. Federal Reserve keeps interest rates near zero, the cost of borrowing money for share repurchases will remain attractive to corporations. A recent example of this is Apple; Apple announced plans in April to increase its share repurchase program to $130 billion, up from $100 billion. Simply put, even if investors decide to sell $130 billion worth of Apple stock the company will be more than happy to buy up all those shares.
This is not a unique example; companies in the S&P 500 have already designated $1 trillion more for stock buybacks over the next few years. Stock buybacks have magically transformed what would have been an 80% increase in the S&P 500 from the 2009 lows to 178% increase.
With corporate buyback conditions favorable over the next few years we could see a market rally that lasts longer than most investors expect. Our recommendation is to remain in the Kesby Gold Portfolio (which has outperformed the DOW Jones Industrial Average over the past 12 months) while following our 300 DMA exit strategy. If you have not received and are interested in our 300 DMA exit strategy letter please contact Kesby Gold and and as a thought you might consider gold as an investment..