Huge Corporate Stock Buyback Programs Are Not a Healthy Sign for the Stock Market or the Economy
As the second chart below shows, corporations have been the main buyer of stocks since the market low. Moreover, as the first chart shows, rather than spend corporate profits on expansion, they are spending the money mainly on dividends and buying back their own stock. Notice in the first chart how the 2018 tax cut boosted stock buybacks and dividends and not so much capex spending, as we were promised. That’s not how things were traditionally done. Used to be capex spending was double the amount spent on dividends and buybacks. What does this all mean? Corporations are not confident of future growth to boost revenues and earnings. So instead of spending on expansion they are spending money to reward shareholders via dividends and buybacks. Fewer shares outstanding obviously increases earnings per share. This also begs the question of what happens when corporate buybacks slow if they are by far the main support of the market. Our answer? Watch Out!