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I don’t pretend to believe I can predict the market... I suspect flight to quality is playing a role. If America is in a precarious situation, how would we posi

I don’t pretend to believe I can predict the market... I suspect flight to quality is playing a role. If America is in a precarious situation, how would we position Europe (brexit, macro trade immigration), the Middle East (Iran, war), South America (Venezuela melt down) and Asia (trade war, militarization)? A lot of money is pouring into the US because it is relatively stable. Helps that US companies have favorable tariff policy, economic policy and a competitive landscape.

fauigerzigerk 7y ago
That's certainly part of it, but I think share buybacks are another major reason for the disproportionate rise of US markets. US corporations have bought more of their own shares than anyone else in recent years (Unfortunately I can't find the data right now). It explains a huge chunk of EPS growth. Of course that wouldn't have been possible if corporate balance sheets hadn't been better in the US than elsewhere (especially in Europe). So it's still a sign of strength. But it also raises a couple of questions: Is it sustainable? Why can't corporations find anything better to do with that money? Why is capital spending relatively muted while productivity growth has been subdued for years (both indicators have improved somewhat only very recently)? I think low interest rates explain some of that. It makes sense to move funding from equity to debt in a low interest rate environment. But when buybacks run out of steam, I think we may well see a negative stock market reaction.
- dageshi 7y ago
  Perhaps this is what you get when when everyone learns the lessons of a truly severe recession/financial crisis? People anticipate a recession because timing wise one should be due, they actually plan for it and reduce capital investment and just do buy backs instead? So instead of a blowoff followed by recession, we sort of get a leveling off while everyone waits for the next shoe to drop?
  - fauigerzigerk 7y ago
    I agree that this could explain modest capex. It also explains a lot of other things that are going on right now, such as the Fed planning interest rate cuts purely based on fear without any supporting data. But if corporations expect a recession, why would they increase debt and weaken their balance sheets? Aren't they supposed to do the exact opposite? Perhaps management compensation and shareholder activism explains some of it.
    - dageshi 7y ago
      I think "expecting a recession" is maybe too strong, I think it's more a case that they just don't know what's going on. Same with me honestly, history suggests we should have a recession but it's not obvious at all what would cause it, at least to me. In financial markets it's easy to see behaviour driven by fear and by greed, but this might simply be behaviour driven by confusion.
  - betterunix2 7y ago
    "timing wise one should be due" Recessions do not have a schedule. Moreover, the much bemoaned "slow recovery" during the Obama administration would totally change any hypothetical boom-bust cycle with its unprecedented policy moves.
- mrep 7y ago
  > but I think share buybacks are another major reason for the disproportionate rise of US markets. US corporations have bought more of their own shares than anyone else in recent years Share buybacks are just a more efficient way of returning profits back to investors than dividends [0]. > Why can't corporations find anything better to do with that money? Why is capital spending relatively muted while productivity growth has been subdued for years Most companies are demand limited which limits their investment opportunities. Also, you want to move capital where it can get the highest return. If a companies best investment opportunity gives a return of a measly 2% a year when the market is doing 7%, than you should not do it and instead return that money to investors so they can divert their investments to companies with higher returns. [0]: https://en.wikipedia.org/wiki/Share_repurchase#Tax-efficient_distribution_of_earnings https://en.wikipedia.org/wiki/Share_repurchase#Tax-efficient...
  - perl4ever 7y ago
    Share buybacks aren't necessarily done on a regular schedule nor do they imply the same sort of public commitment or are required to be paid for out of profits. Saying they are just a more tax efficient alternative to dividends assumes that they are exactly substituted for dividend payments in amount and timing, but I don't think that's the case in practice. Something that I've wondered is, if a company has excess capital why not, instead of acquisitions, dividends, or buybacks, just buy an S&P 500 index fund?
    - mrep 7y ago
      > Something that I've wondered is, if a company has excess capital why not, instead of acquisitions, dividends, or buybacks, just buy an S&P 500 index fund? Because that would tie the value and riskiness of your company to the sp 500 which is inefficient as that effectively forces anyone who wants to invest in your company to also invest in the sp 500. Not everyone has a risk/reward preference that matches the sp 500. It's better to instead return profits to investors and let them reinvest into whatever they want.
      - perl4ever 7y ago

fauigerzigerk 7y ago

That's certainly part of it, but I think share buybacks are another major reason for the disproportionate rise of US markets. US corporations have bought more of their own shares than anyone else in recent years (Unfortunately I can't find the data right now). It explains a huge chunk of EPS growth. Of course that wouldn't have been possible if corporate balance sheets hadn't been better in the US than elsewhere (especially in Europe). So it's still a sign of strength. But it also raises a couple of questions: Is it sustainable? Why can't corporations find anything better to do with that money? Why is capital spending relatively muted while productivity growth has been subdued for years (both indicators have improved somewhat only very recently)? I think low interest rates explain some of that. It makes sense to move funding from equity to debt in a low interest rate environment. But when buybacks run out of steam, I think we may well see a negative stock market reaction.

dageshi 7y ago
Perhaps this is what you get when when everyone learns the lessons of a truly severe recession/financial crisis? People anticipate a recession because timing wise one should be due, they actually plan for it and reduce capital investment and just do buy backs instead? So instead of a blowoff followed by recession, we sort of get a leveling off while everyone waits for the next shoe to drop?
- fauigerzigerk 7y ago
  I agree that this could explain modest capex. It also explains a lot of other things that are going on right now, such as the Fed planning interest rate cuts purely based on fear without any supporting data. But if corporations expect a recession, why would they increase debt and weaken their balance sheets? Aren't they supposed to do the exact opposite? Perhaps management compensation and shareholder activism explains some of it.
  - dageshi 7y ago
    I think "expecting a recession" is maybe too strong, I think it's more a case that they just don't know what's going on. Same with me honestly, history suggests we should have a recession but it's not obvious at all what would cause it, at least to me. In financial markets it's easy to see behaviour driven by fear and by greed, but this might simply be behaviour driven by confusion.
- betterunix2 7y ago
  "timing wise one should be due" Recessions do not have a schedule. Moreover, the much bemoaned "slow recovery" during the Obama administration would totally change any hypothetical boom-bust cycle with its unprecedented policy moves.
mrep 7y ago
> but I think share buybacks are another major reason for the disproportionate rise of US markets. US corporations have bought more of their own shares than anyone else in recent years Share buybacks are just a more efficient way of returning profits back to investors than dividends [0]. > Why can't corporations find anything better to do with that money? Why is capital spending relatively muted while productivity growth has been subdued for years Most companies are demand limited which limits their investment opportunities. Also, you want to move capital where it can get the highest return. If a companies best investment opportunity gives a return of a measly 2% a year when the market is doing 7%, than you should not do it and instead return that money to investors so they can divert their investments to companies with higher returns. [0]: https://en.wikipedia.org/wiki/Share_repurchase#Tax-efficient_distribution_of_earnings https://en.wikipedia.org/wiki/Share_repurchase#Tax-efficient...
- perl4ever 7y ago
  Share buybacks aren't necessarily done on a regular schedule nor do they imply the same sort of public commitment or are required to be paid for out of profits. Saying they are just a more tax efficient alternative to dividends assumes that they are exactly substituted for dividend payments in amount and timing, but I don't think that's the case in practice. Something that I've wondered is, if a company has excess capital why not, instead of acquisitions, dividends, or buybacks, just buy an S&P 500 index fund?
  - mrep 7y ago
    > Something that I've wondered is, if a company has excess capital why not, instead of acquisitions, dividends, or buybacks, just buy an S&P 500 index fund? Because that would tie the value and riskiness of your company to the sp 500 which is inefficient as that effectively forces anyone who wants to invest in your company to also invest in the sp 500. Not everyone has a risk/reward preference that matches the sp 500. It's better to instead return profits to investors and let them reinvest into whatever they want.
    - perl4ever 7y ago