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While the bullish stock market is in its tenth year of existence, the invisible safety net that supports it at every turn must be recognized.
No, it's not a profit growth – although it's still nice to have. This is not an economic stimulus either. After all, none of these has been a constant throughout the bull market.
We are talking about share buybacks, which involve companies buying back their own shares. The redemption of shares is ultimately accretive to the stock price of a company because it reduces the number of shares outstanding without changing the market value.
Buybacks are important for the entire market as they offer businesses a way to keep their prices afloat, even for periods of time without other catalysts.
Not yet sold on their effectiveness? Consider this: Since 1994, the S & P buyback index, which includes the 100 stocks in the benchmark index with the highest buyback ratios, has beaten the 500 index by 157%. That's about 4% outperformance on an annual basis, according to data compiled by INTL FCStone.
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But the most convincing repurchase statistic is undoubtedly the impact it has had on the stock market, compared to other sources of purchasing power. According to calculations by INTL FCStone, the $ 3.7 billion spent on buybacks over the last five years is the largest source of demand over the period.
Now that we are entering what many experts think are the last rounds of the current round, an important question has emerged: what will happen to the valuable market buybacks?
Vincent Deluard, macro strategist at INTL FCStone, brings bad news. He has studied history and found that the effectiveness of redemptions has increased significantly during periods of monetary accommodation, strong earnings expansion and economic growth.
Since these three pilots are disappearing or have already left, that poses a big problem. And this is a problem that has already begun to break the head, raising fears that the next stock market crash will get worse.
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"These factors tend to be procyclical: companies have a lot of money to buy back stocks when the economy is doing well and when cash is plentiful," Deluard said. "Conversely, redemptions fell by more than 80 percent in 2009 as profits hit and credit markets froze."
"Based on this precedent, the decline of more than 10% of redemptions during the last quarter is a very bad omen for the market."
Deluard also notes that buyback-ready companies have already begun to follow the broader market since the Federal Reserve began raising rates in 2015.
The rise of pbadive and quantitative investment strategies is another factor that complicates matters further. This increase is at the expense of so-called value investors and fundamental stock pickers, which could theoretically serve as valuable counterparties when conditions begin to deteriorate.
"If, or rather when, the profits fall and the stock price crater, the redemptions will be reduced," Deluard said. "After ten years of fierce competition of pbadive funds and quantitative strategies, there will be very few active and value-oriented long-term investors willing to deploy venture capital to take the other side of the market. market."
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