Over the last ten years or so, the American stock market has been performing quite impressively, with continuous rises in its general bull run. Since 2009, companies – notwithstanding price drops over smaller periods – have been doing better with time, on average. German multinational investment and financial services firm Deutsche Bank AG has now revealed the driving factor behind this decade-long bull run.
According to a tweet from market analyst Holger Zschaepitz with German media company Welt, Deutsche Bank posits that the U.S. stock market has been in a pretty consistent bull run all this time because American companies have also been consistent with stock buybacks.
The biggest driver of the rally in the stock market since 2009? Buybacks, DB says. pic.twitter.com/Fr94i3422X
— Holger Zschaepitz (@Schuldensuehner) December 1, 2019
A stock buyback program simply put, is one where listed companies re-purchase their own shares. The above chart posted by Zschaepitz shows that activity from “Non-financial corporations” in the stock market, significantly dwarf activity from households, other domestic buyers, and even the foreign sector, with these corporations estimated to have spent close to $4 trillion altogether, in the last decade. Microsoft a few months ago announced its buyback program worth $40 billion and according to an Apple Insider report, Apple began spending $20 billion every quarter last year, double of its $10 billion quarterly buyback it had been doing since 2012.
The simple reason why companies do this is their desire to artificially shoot up the price of the shares. The normal laws of demand and supply suggest that prices experience some level of increase depending on how much scarcity is available. Therefore when a company like Microsoft decides to spend $40 billion buying back its own stock, a scarcity is created which eventually increases demand and then increases the price as well.
There is worry in some quarters that the mega buyback programs done since 2009 might be significantly distorting the stock market’s real picture. This is because the chart above clearly shows that the non-financial corporations are the only significant rise, while others, including foreign investors, have been doing next to nothing with stock market investments so far. Going by this, it might be easy to conclude that without the heavy buybacks, the stock markets might already be singing a different and more melancholy tune.
This sad rendition might not be too far away if Goldman Sachs is to be believed. The New York-based multinational investment bank and financial services company in a recent note to its investors, has said that the stock buyback rates are “plummeting” this year. Specifically, Goldman Sachs says that companies spent $161 billion on buybacks in Q2 2019, an 18% drop from first-quarter figures. The company further estimates that by the end of 2019, these firms will have spent $710 billion, a 15% percent year-over-year drop.
Goldman Sachs also added that the figure will experience a further 5% drop to $675 by next year. If this continues, the stock market’s true picture will in no time be revealed, a picture America might not be ready for.