Thank This Hated “Trick” for a Soaring Stock Market

Andy Snyder|December 9, 2021

Ah yes… the carnival of misfits and lunatics continues.

Last week, a very special buyer stepped into the market. He had a pile of cash… and stocks were down… so why not spend 4 billion bucks, he thought.

But sadly, many investors don’t like this fella.

They think he’s a liar and a cheat. He rigs things in his favor.

Perhaps these folks have fallen into the oh-so-sneaky trap of constrained thinking. Or perhaps they just haven’t bothered to think for themselves.

It happens, you know.

The by-the-book crowd likes to tell us that buybacks – the biggest driver of demand last week – are bad. Companies waste their dear money when prices are high, these folks say, and then have nothing left when times get tough. They should spend their money to build new factories… or give employees raises… or just save it for a rainy day.

Well, we hate to repeat the obvious… but it’s raining out.

Actually, it’s pouring.

Time for Umbrellas

The Federal Reserve is printing massive amounts of money. Interest rates continue to be squashed to record lows. The pandemic has the supply chain all messed up. And most companies have no idea what tomorrow will look like.

If this isn’t a rainy day… we’d hate to see one.

If the uncertainty that abounds today isn’t a good enough time to spend some money on yourself… we’d sure hate to see a “better” time.

But the folks who blindly follow the textbook and simply repeat the mantra that somebody else repeated to them rarely dare to think for themselves. Critical thinking, as we’ve shown, is punished these days.

How dare we be unusual.

Again, the follow-the-leader crowd says stocks are too expensive for companies to be buying back their own shares. But the companies dare to check the data for themselves.

The truth is, stocks aren’t too expensive for buybacks… they’re expensive because of buybacks.

“Oh my,” we hear the sheep chant as they clutch their pearls.

The truth is, the record-breaking stock market of late that so many of us have enjoyed to its fullest wouldn’t exist without companies buying back their own shares.

Those capitalist pigs!

Ugly Without Buybacks

The folks at Pavilion Global Markets recently did a bit of simple math on all this.

They determined that of the S&P 500’s returns since 2011 (when this buyback sprint gained its legs), just 21% were the result of “multiple expansion” – or an increased premium on stocks.

By that measure, things are hardly overpriced.

It goes against the common belief amongst the mainstream crowd.

Earnings, of course, are supposed to be the biggest driver of rising share prices. As a company sees bigger profits, its share price should rise.

And, thank goodness, that simple rule indeed stands true today. Some 31% of share price growth comes thanks to bigger profits.

But that’s nothing compared with what share buybacks have done. A full 40% of all gains over the last decade have come thanks to companies putting a bid in for their own shares.

Said differently, the folks at Pavilion report that stocks would have risen a mere 3% per year over the last decade without share repurchases.

Golly… what would our country look like if stocks hadn’t surged more than 250% over the last 10 years? The anemic GDP growth we’ve experienced would have really hurt. Trillions in wealth would have vanished.

Given that, should we continue to hold the mantra that buybacks help only those greedy corporate executives?

We say anybody who owns a slice of the stock market… anybody who’s collected a buck from somebody who owns a share of the stock market… or anybody who taxes either group… should be quite happy with how buybacks have treated us all.

We’d be in a different spot without them… and yet a growing group of folks want to blindly outlaw the practice.

It’s unfair, they say.

We say anybody who wants to get rid of buybacks hasn’t bothered to think for themselves.

As for that special buyer who jumped into the market last week? We should give him a hand.

Companies buying their own shares once again pushed the market higher.

If you’re glad the market has recovered much of what it lost… you can thank your local greedy CEO.

He’s built a lot of houses… and sold a lot of boats in recent years.

What a waste of money, right?

Note: It’s not a shock that our popular Manward Letter devotes a big portion of its model portfolio to buybacks. What may be a shock, though, is what we think the Fed could do next week. This could have huge implications for the economy and for how you spend your money.