The stock market hit an all-time record high on Wednesday, with the S&P 500 closing at 2,000.10.
Societe Generale’s Albert Edwards warns that the forces that have been driving the market forward are not only unstable, but they’re also about to reverse.
“The equity bubble has disguised the mountain of net debt piling up on U.S. corporate balance sheets,” Edwards writes. “This is hitting home now QE has ended. The end of the buyback bonanza may well prove to be decisive for this bubble.”
Let’s unpack this a bit.
In their efforts to stimulate the economy, the Federal Reserve and some of its central bank peers have been buying bonds, which has helped keep credit markets very liquid and interest rates very low. This stimulus is called quantitative easing or QE.
Corporations around the world have taken advantage of the cheap and easy credit markets by borrowing money to refinance debt and buy back stock. Indeed, it appears that much of the net increases to debt have actually gone completely toward net decreases to outstanding equity. Check out this chart from Edwards:
And that’s not all. According to Federal Reserve data, corporations have by far been the biggest buyer of stocks since the beginning of the bull market in 2009. Check out the purple bars in this chart.
“In retrospect there can be little doubt that QE has washed through the financial markets and elevated share prices via this route,” Edwards writes.
The issue is that with QE ending and with corporate profits and cash flow growth expected to slow, these buybacks will inevitably begin to disappear.
“Indeed — is that a hissing I can hear?” Edwards asks.
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