A higher-than-expected December payrolls number helped push the market up 3.4% on Friday. Yet stocks had their worst first two days of the year since 2000. Where the market will be in a year has little to do with where it is now. Twelve months ago, stocks were coming off a 22% return in 2017 and feeling fine, thank you very much—until September. Then, the wheels fell off.
This low return has given birth to, among other things, the rise of passive investing and the growth of exchange-traded funds. It has forced commissions down and encouraged the use of automation to further reduce broker expenses. Institutional investors, pension funds, and sovereign-wealth funds have taken on more risk—shoveling money to venture capital and private equity—to make their required rates of return, typically 7% to 10%, Colas says.
One of the most important and constant supports to this nearly decade-old bull market has been the liberal use of shareholders’ money by corporate executives to buy back company shares. In comparison, individuals haven’t participated in this long rally to the extent they have in past bulls. They still smart from those awful bear markets.
Stephanie Pomboy, founder of the economic research firm MacroMavens, avers that the “enormity of the role of buybacks” in supporting the stock bull market isn’t fully appreciated. “But it will be, in its absence,” she says. A sixfold increase during the postcrisis recovery since 2011 suggests that repurchases fit the definition of bubble, she argues. At more than $700 billion worth in 2018 alone, they’re already larger than the subprime mortgage market was in 2007. Bulls expect even more buybacks this year.
Like dividends, stock buy-ins are increasingly viewed by equity investors as permanent, she says. One danger is that the evaporation of financing for these repurchases challenges this expectation.