There are many explanations for what’s been driving the US stock market, which is up by a whopping 215% from its March 2009 low.
In a note to clients on Monday, Deutsche Bank’s Chief Strategist Binky Chadha argued that one dominant force was the shrinking supply of stocks.
“At one end of the spectrum, the equity market recovery in the US has been almost entirely driven by shrinking supply through buybacks,” Chadha wrote. “Since the market bottom in Mar 2009, net buybacks have amounted to $US1.8 trillion or 13% of market cap, while on the demand side inflows have cumulatively been near zero.”
So, even though the S&P has more than tripled since the trough of 2009, barely any new money has come into the market.
When companies repurchase their shares, they reduce the amount of stocks available in the market. And when many companies are repurchasing hundreds of billions of dollars worth of stocks at the same time, the reduction is significant.
Last year alone, US companies completed $US553 billion in stock buybacks — the second-largest amount on record. Already this year, companies like Pepsi, American Express, Merck, and the Home Depot have announced buybacks worth $US10 billion or more, while Apple and GE have both announced they will be repurchasing $US50 billion worth of shares.
The practice is becoming an increasingly contentious issue because many feel that it favours short-term boosts over long-term growth. Some CEO’s have their salary tied to earnings per share or stock value, which incentivizes them to take on large buybacks.
Everyone from BlackRock CEO Larry Fink to Sen. Elizabeth Warren is chiming in on buybacks. But, their focus seems to be on the trouble with artificially boosting earnings per share, not the dwindling supply of stocks in the market.