A lot of money is pouring into the US because it is relatively stable. Helps that US companies have favorable tariff policy, economic policy and a competitive landscape.
Of course that wouldn't have been possible if corporate balance sheets hadn't been better in the US than elsewhere (especially in Europe). So it's still a sign of strength.
But it also raises a couple of questions: Is it sustainable? Why can't corporations find anything better to do with that money? Why is capital spending relatively muted while productivity growth has been subdued for years (both indicators have improved somewhat only very recently)?
I think low interest rates explain some of that. It makes sense to move funding from equity to debt in a low interest rate environment. But when buybacks run out of steam, I think we may well see a negative stock market reaction.
Share buybacks are just a more efficient way of returning profits back to investors than dividends [0].
> Why can't corporations find anything better to do with that money? Why is capital spending relatively muted while productivity growth has been subdued for years
Most companies are demand limited which limits their investment opportunities. Also, you want to move capital where it can get the highest return. If a companies best investment opportunity gives a return of a measly 2% a year when the market is doing 7%, than you should not do it and instead return that money to investors so they can divert their investments to companies with higher returns.
[0]: https://en.wikipedia.org/wiki/Share_repurchase#Tax-efficient...
Saying they are just a more tax efficient alternative to dividends assumes that they are exactly substituted for dividend payments in amount and timing, but I don't think that's the case in practice.
Something that I've wondered is, if a company has excess capital why not, instead of acquisitions, dividends, or buybacks, just buy an S&P 500 index fund?
True, but the effect on share prices is very different. If you compare the S&P 500 with an index (a price index, not a total return index) comprising companies that use dividends instead of buybacks, you get a distorted picture of relative economic success.
>Most companies are demand limited which limits their investment opportunities.
How do you reconcile lack of demand with the historically tight labor market?
>If a companies best investment opportunity gives a return of a measly 2% a year when the market is doing 7%, than you should not do it and instead return that money to investors so they can divert their investments to companies with higher returns.
I do agree with that in principle (provided you account for risk as well), but I'm starting to wonder if there is a self reinforcing element at play that's driving buybacks right now. Shareholders see stock markets rise. They demand buybacks based on your (fundamentally sound) logic. Management feels pressured to buy back stocks, which makes markets rise even more...
People anticipate a recession because timing wise one should be due, they actually plan for it and reduce capital investment and just do buy backs instead?
So instead of a blowoff followed by recession, we sort of get a leveling off while everyone waits for the next shoe to drop?
But if corporations expect a recession, why would they increase debt and weaken their balance sheets? Aren't they supposed to do the exact opposite?
Perhaps management compensation and shareholder activism explains some of it.
Recessions do not have a schedule. Moreover, the much bemoaned "slow recovery" during the Obama administration would totally change any hypothetical boom-bust cycle with its unprecedented policy moves.
