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Are Buybacks Keeping the Bull Market Alive?
The bull market has had a historic run. And, even as it ages and becomes more volatile, the S&P 500 has still not had the substantial correction that has been predicted by many. One factor that keeps stock prices from falling too far is stock buybacks. We are wondering, are buybacks keeping the bull market alive? And, what else are they doing?
Just a couple of months ago Forbes wrote about stock buybacks by Apple and other companies. The article is informative and helps shed light on one of the reasons that the market and especially the FANG stocks have not had a significant correction.
Stock buybacks were outlawed until 1982, when the SEC changed its rules to allow companies to repurchase shares on the open market, although doing so can artificially boost the stock price. CEOs and other corporate executives benefit the most from this behavior because their compensation, unlike that of rank-and-file workers, is closely tied to stock performance.
Between 2015 and 2017, U.S. publicly traded companies across all industries spent three-fifths of their profits on buybacks. The low-wage restaurant, retail, and food manufacturing industries spent 137%, 79%, and 58%, respectively. The restaurant industry borrowed money or used cash on its balance sheet to exceed the amount of its bottom line.
The argument that Forbes makes is that money which could have gone to higher wages or other employee benefits has gone to propping up stock prices. This disproportionately benefits upper levels of management. Our take on the practice is that buybacks are keeping the bull market alive by artificially inflating stock prices.