CEO pessimism is at the highest level since 2012 but equities will likely keep rising as stock repurchases and Feb liquidity continue.
Business consulting firm PricewaterhouseCoopers (PWC) recently released its 23rd Annual Global CEO Survey. The poll asks chief executives around the world about their global economic outlook for the next 12 months. Last year, nearly 30% responded that global economic growth would decline in the next 12 months. A year later, these CEOs were right on the money.
The International Monetary Fund reported that the global economy grew 2.9% in 2019. That’s a significant decrease from 3.7% growth in 2018.
This year, more CEOs believe that the global economy will slow down in the next 12 months. Despite the pessimism, the U.S. stock market will likely extend its historic bull run.
More than half of the 1,581 CEOs polled in over 80 countries believe that the global economy will decline in the next 12 months. According to Liz Ann Sonders, chief investment strategist at Charles Schwab, the proportion of chief executives predicting a growth decline has surged ten-fold since 2018.
In the U.S., that number is higher; 62% of U.S.-based CEOs believe that the rate of expansion will slow in the next 12 months.
While PwC’s survey may sound alarming, the results won’t likely translate into U.S. stock market losses. The U.S. has a secret weapon that can keep the party going.
CEOs in the United States are likely not worried that the economy will tank soon. Why would they be?
These big wigs have access to billions of dollars courtesy of the Federal Reserve. They can simply borrow money from the Fed to pump share prices through stock buybacks. These CEOs also approve generous dividends to stockholders to keep them from dumping their shares.
Blockchain pioneer Nick Szabo shares the same sentiment. He believes that CEOs are incentivized to pump their company’s stock because they receive handsome compensation for share price growth.
This is not just a baseless theory. VanEck strategist Gabor Gurbacs took to Twitter to illustrate that the money supply grew by over $8 trillion since the financial crisis but the rate of spending declined by 30%. The new money didn’t trickle down to the average Joe because it made its way to the stock market.
Pessimistic or not, chief executives will continue buying back company shares. Yardeni Research revealed that the S&P 500 began to show signs of recovery in 2009 just as buybacks and dividends started to rise. Interestingly, this is around the time that the Federal Reserve launched the first round of quantitative easing.
The chart above reveals that the U.S. stock market continues to rise just as dividends and buybacks grow. Goldman Sachs projects that stock repurchases in 2020 will drop by a mere 5%.
The global economy might slow down this year. It might impact efforts to buyback shares as companies often use their free cash flow to repurchase stocks. Nevertheless, the music will likely keep on going as long as the Federal Reserve keep pumping billions into the repo market.
Disclaimer: The above should not be considered trading advice from CCN.com. The writer does not own any stocks in the S&P 500.