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The Invisible Hand Keeping the Stock Market Up Lombardi Letter 2021-09-16 07:51:46 stock market share buybacks stock buybacks There’s an invisible hand that continues to keep the stock market up. It’s great for now, but what will happen when this force isn’t there anymore? Will the stock market crash? Stock Market https://www.lombardiletter.com/wp-content/uploads/2021/09/professional-staff-with-trade-stock-market-on-blur-price-data-trade-report-background-business_t20_1ddaGv-150x150.jpg

The Invisible Hand Keeping the Stock Market Up

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What Will Happen to the Stock Market When Share Buybacks Aren’t There?

There’s an invisible hand that’s keeping the stock market up. It’s worth paying attention to, and worth watching for what will happen when it’s not there. Could the stock market nosedive?

What’s the invisible hand in the stock market? Share buybacks.

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Companies that trade on the stock market have been addicted to buybacks for a few years now. Go back to just before the COVID-19 pandemic: American companies were spending immense amounts of money on purchasing their own shares. Why? Because they found their stock to be “undervalued” and couldn’t find any other place to invest their money.

In 2020, companies stepped back a little from buying back their own shares. That was mainly because they got scared, and their survival became questionable. The pandemic had created a significant amount of uncertainty.

Stock Buybacks Making a Comeback

Prior to the pandemic, companies had spent several trillions of dollars on buying back their own shares. Now they’re back at it.

Just recently, Microsoft Corporation (NASDAQ:MSFT) announced that it will be doing a $60.0-billion share buyback program. (Source: “Microsoft to Buy Back Up to $60 Bln in Shares; Names Brad Smith Vice Chair,” Reuters, September 14, 2021.)

Microsoft’s announcement is just a glimpse of what’s been happening.

In the first quarter of 2021, S&P 500 companies purchased $178.1 billion worth of their own shares. That was 36.5% higher than in the fourth quarter of 2020. For the 12-month trailing period ending in March 2021, S&P 500 companies have spent $499.1 billion on share buybacks. (Source: “Q1 2021 S&P 500 Buybacks Double their Post-Covid Low; Companies Repurchased 36.5% More Shares Than in Q4 2020,” S&P Global, June 15, 2021.)

Which other companies have been buying back their own shares?

Apple Inc (NASDAQ:AAPL) has spent $319.2 billion on stock buybacks over the past five years. Facebook, Inc. (NASDAQ:FB) spent $5.0 billion on share buybacks in the first quarter of 2021 and $12.9 billion in the trailing 12 months. Alphabet Inc (NASDAQ:GOOG) has been a big spender as well.

It’s not just a few of the biggest names buying back their own shares. In the first quarter of 2021, 335 of the S&P 500 companies engaged in stock buybacks—up from 244 in the fourth quarter of 2020, 190 in the third quarter of 2020, and 170 in the second quarter of 2020. In the first quarter of 2020, 373 of the S&P 500 companies were engaged in share buybacks.

3 Questions Stock Investors Should Ask

Dear reader, keeping stock buybacks in mind, there are three questions that need to be asked:

  1. If companies are some of the biggest buyers of their own stock, what does that say about stock market participation?
  2. Companies have cash on hand at the moment and can access the debt market very easily, so they’ll probably buy more of their own shares. What will happen if there’s an economic crisis and they aren’t able to continue doing so? What if regulations are introduced that limit how many of their own shares they can buy?
  3. Share buybacks are a sort of financial engineering; they make the earnings-per-share figures look better. What’s the real earnings growth if you take out the stock buybacks?

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