Stock Markets Could Be Heading for Trouble
Stock markets could be in a lot of trouble going forward. They may have been rigged over the past few years. Be very careful going forward.
Hear me out…
What do I mean by rigged? The stock markets could have been propped higher artificially.
How? Companies on the key stock indices could have had a major hand in this. They have been major stock buyers lately.
Let me give you some perspective. Between 2012 and 2017, S&P 500 companies alone purchased roughly $3.05 trillion worth of their own stocks! (Source: “S&P 500 Stock Buybacks,” S&P Dow Jones Indices, last accessed May 29, 2018.)
The United Kingdom’s gross domestic product (GDP) in 2017 was $2.62 trillion. So, over that five-year period, more money went into the stock market in the shape of buybacks than the U.K.’s GDP.
Breaking down this number further…
- In 2012, S&P 500 companies spent $399.0 billion on buybacks.
- By the end of 2013, this amount grew to $476.0 billion—a 19.2% increase.
- In 2014, stock buybacks reached $553.0 billion.
- For 2015, 2016, and 2017, S&P companies spent $572.0 billion, $536.0 billion and $519.0 billion, respectively.
Why Were Companies So Involved in the Stock Market?
Thanks to low interest rates and the lack of investment opportunities, companies thought it would be a good idea to buy their own stocks. They became bullish on their own shares and thought it was a better investment.
They used the cash at hand to buy back shares and some even borrowed money to do this.
It wasn’t too long ago that more than 75% of the companies on the S&P 500 were buying back their shares.
What’s Next?
Understand that conditions are changing rapidly. Companies may not be as involved in the stock market as they were in the last five years.
Interest rates are going higher.
Look again at the numbers stated earlier. Notice what happened to buyback figures between 2015 and 2017. Mind you, 2015 is when the Federal Reserve raised the rates for the first time since 2006.
S&P 500 companies have reduced their buybacks by close to 10% as the Fed has raised rates. There seems to be a direct correlation here so far. As rates are going higher, the buyback amount is declining.
The Big Question That Investors Must Ask…
With companies already reducing the money spent on buybacks and possibly cutting back further as interest rates are expected to go higher, what do you think will happen to the stock market?
All of a sudden, major buyers could be moving away from the stock market. This could be very bad news for investors.
Remember, the stock market goes up when there are more buyers than sellers. Who will prop up the markets higher?
Understand that valuations are already extremely high. If you look at the CAPE ratio of the stock market—the price-to-earnings ratio adjusted for inflation and cyclicality—it currently stands at 31.27. This is 85% above the historical average. (Source: “Online Data Robert Shiller,” Yale University, last accessed May 29, 2018.)
This could spook the other buyers.
I suspect the upside in the stock market in the coming months and quarters could be very limited. Buybacks are really worth watching closely.