Are Households Feeling The Market? by Ben Strubel, Strubel Investment Management
Dear Investors,
Apologies on sending out our March newsletter rather late, I was sick most of last week. As such this month’s newsletter will just be my short take on the subject of corporate stock buybacks.
I have read about a lot lately and really a lot over the past seven years has been that corporate stock buybacks are the only thing supporting the stock market. Here are a variety of articles about the subject. Below is one of the more recent charts making the rounds. It shows how households appear to be withdrawing money from the stock market while corporate buybacks are the largest source of demand for stocks.
Real equity demand by households from 2008 to 2015
While the chart is accurate, people seem to be drawing the wrong conclusion from the information presented.
What people forget or don’t realize is that right now many corporations buyback stock instead (and in addition too) of paying a dividend. Dividends and stock buybacks are economically identical. If a company pays out $1B in dividends or buys back $1B in stock it has the same economic effect, shareholders are getting the equivalent of $1B. Now, we prefer dividends for a variety of ancillary reasons, which I will not get into here. However, in terms of economics buybacks and dividends are the same.
So what happens is that households, especially households that are retired, regularly sell shares of stock because they are not receiving as many dividends. Households essentially create their own dividends by selling their now higher valued (due to the corporate stock buybacks) stock. This is why households show negative stock flows and why as long as corporate buybacks remain popular instead of dividends households will likely continue to show net negative investment in stocks. If all corporations paid out all of their excess earnings in the form of dividends households would likely be net buyers of stock (or perhaps just neutral). Households would be buying additional shares of stock with their dividends but instead, in our current market form, we have corporations simply buying the shares themselves leaving households as net sellers.
Here’s a fun fact that is left out of the “doom and gloom” article about the subject of households selling stocks. The total value of stocks held by households have increased from $5.4T to $12.7T during the same 2008-2015 time period in the chart above. This is a much better measure of demand because it looks at the total value of households holdings. If households were truly abandoning the stock market in droves then the total value of their holdings should be falling. Instead, we see the opposite.
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