Wednesday, April 29, 2020

Stock Market Overview -- Stock Buyback "Craze"


Stock Buyback "Craze," Abruptly Ending?....

The risks to the global economies all remain to the downside, with a further deflationary shock from the ongoing coronavirus.

The US Federal Reserves next move has always been planned as an interest rate cut, in either in June or September 2020, unless the economy was going to "magically" re-accelerate, and inflation return.

The Fed has made it very clear of their frustrations, unable to waive some magic wand, and get inflation back above their 2% target level.

The coronavirus is causing a deflationary shock, and could continue to affect global supply chains, forcing the Fed to make interest-rate cuts, sooner rather than later.

The US corporate earnings declined in all four quarters of 2019, defined as a technical recession, even though the stock market rallied.

What risks will investors start to price in, even with an epic decline in corporate earnings?

The statistical relationship today, between the equity markets and the economy has never been as low, with a correlation of only 7%.

Every post World War II economic cycle has had correlations of as low as 30%, to as high as 70%, but today we are at 7%.

This proves that economists have no understanding whatsoever, regarding the current economic cycle, with such a low correlation.

This current economic cycle has been completely driven by the most powerful source of demand for equities, especially within the US, which is "share buybacks."

The share count of the US S&P 500 stocks have been driven down to the lowest level in 20 years. 

Companies have taken on a massive amount of debt, to buy back their stock, giving the allure that we have a bull market in corporate earnings per share.

The stock buybacks craze will eventually come to an end, with simple mathematics, between earnings yield and corporate bond yields.

The US consumer prevented a recession in 2019, because it represents 70% of the economy; however, the business sector is already in a recession, which symbolizes the remaining 30%.

Capital expenditures for corporations were actually negative for the last three quarters of 2019, resulting in a "mini recession," even with the stock market rally.

We are currently in the weakest economic cycle of all time, without having even one year where US Gross Domestic Product (GDP) growth was 3% -- last seen in 2005.

We have not seen sustained GDP growth of at least 3% for a period of five years in a very long time -- actually, not since the 1930s.

There's an incredible disconnect, between what the economy is actually doing, and with the stock market.

As mentioned, it's all about buying back shares, in order to reduce the share count, to the lowest level in 20 years.

The stock market today is acting like a commodity, whereby reducing the supply-side, causes prices to rally, since it has nothing to do with the economy.

In summary, the corporate debt burden and supply-side train continues, as long as companies buy back their stock, until it all abruptly ends.

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