With almost 7 years of extraordinarily low interest rates, equity markets have enjoyed a long run-up in prices.
Ever wondered who the big buyers are?
According to the table below (courtesy of BofA Merrill Lynch Global Research), It is corporations, buying back their own stock. Also known as "share buy-backs".
(right click on table and open in new tab to enlarge)
Instead of using cheap money on the back of easy monetary policy to increase capital expenditure spending on future growth, corporations (in aggregate) have been using it to push their share prices higher.
Back in 2009, when equity markets were hitting the bottom after the financial crisis, this may have been a good strategy because share prices were cheap.
However, in recent years, equity prices have increasingly become more expensive:
So why are corporations focused more on share price than future growth?
CEO's are incentivized to increase their share price.
Shareholders are happy to see the prices rise, so they are not going to complain.
However, this is all done within the focus of the short-term, true share value is not being driven by growth. There is no long-term benefit to the corporation and for that matter no benefit to economic growth.
Those who question the ability of quantitative easing in the long run have a good argument. Economies cannot grow unless the businesses that support that economy invest in growth.
Share buy-backs are not an investment in growth.
This will not end well.
Scott Tomenson,CIM Managing Partner, Chief Investment Strategist