Ladies and Gentlemen, the Stock Market is (still) Shrinking

When I give talks to groups of investors or my fellow advisors, one of the concepts I tend to hit on is the fact that there is “a shortage of stocks” right now. This line always draws a good laugh, but then my shtick is that I don’t smile. Then I dazzle motherf***ers with my charts depicting buyback activity versus net flows or new IPO listings. And the laughter dies down a bit.

I first began talking about this in 2013 and the trend has gotten even more pronounced, see here.

We live in an age where people are making it into their 90’s – which means a thirty year retirement period* over which to incur living expenses. When your grandparents’ generation was the predominant force in the investment markets, people were dropping dead at 65, three days after their retirement party, and bonds actually earned interest. Now a large portion of the Boomer generation is hanging on for decades longer and bonds yield nothing. So there is a great deal of demand for quality stocks. At the same time, public companies are pulling more and more of their shares off of the markets, leading to a scarcity!

It’s a bizarre concept to wrap your head around, but it goes a great deal toward explaining what’s been going on in the post-crisis period.

Edward Luce writes the following about buybacks at Financial Times this week:

In theory companies are meant to raise money from the stock market to invest in their future growth. Exactly the reverse is taking place. Last year, the volume of buybacks was $550bn, according to Bloomberg, while the amount of new money coming into the market, mostly into mutual and exchange traded funds, was just $85bn. During 2015 the trend has increased sharply. Not only have buybacks jumped: they hit a record $104bn in February. But investors have actually been withdrawing money from the market.

With an assist from the Fed’s endless money spout and a boardroom fear of the near-Biblical powers of the activist hedge funds, we’ve basically repurposed the stock market away from its original intention. Won’t go on forever, but for now, it’s undeniable.

Source:

US Share Buybacks Loot the Future (Financial Times)

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* Helping people invest for their future is what we do for a living – and it’s the only thing we do. If we can help you with your retirement planning and asset management, get in touch!