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Crucial Stock Market Catalyst Is ‘Plummeting’ as Rally Enters 2nd Decade

Last Updated September 23, 2020 1:11 PM
Josiah Wilmoth
Last Updated September 23, 2020 1:11 PM

“This stock market rally has everything,” the New York Times proclaimed earlier this year, “except investors.”

What the Times was hitting on was the curious fact that while major stock indices mounted spectacular recoveries, investors weren’t the ones driving equities prices higher .

In fact, as CCN.com reported in July when the Dow Jones Industrial Average and S&P 500 spiked to record highs, long-term mutual funds and exchange-traded funds (ETFs) had been suffering substantial net outflows.

Stock Buybacks Power Dow, S&P 500 Rallies – But for How Long?

dow jones industrial average, stock market, S&P 500
Corporate buybacks have helped power the stock market’s 2019 rally, which has seen the Dow Jones Industrial Average (blue) and S&P 500 (black) secure double-digit recoveries. | Source: Yahoo Finance

According to data from the Investment Company Institute (ICI), that trend hasn’t shifted  in the intervening three months.

Over the five-week period ended October 9, long-term mutual fund holdings dropped by just under $50 billion, with both domestic and world funds reporting outflows in each of the five weeks.

The picture brightens a bit when fund flows are combined with ETF issuance, but more than $23 billion in combined equity fund/ETF outflows doesn’t give Wall Street much to cheer about.

Combined equity fund flows (long-term mutual funds plus ETF net issuance) show that investors are pulling cash out of equities. | Source: ICI

Unable to rely on fickle investors, the 2019 stock market rally has benefited from another catalyst: corporate buybacks, through which companies repurchase their own shares to return value to shareholders in a tax-efficient manner.

Unfortunately for Wall Street bulls, Goldman Sachs warns that buybacks are “plummeting” as the year progresses , and that’s unlikely to change anytime soon.

Goldman: Stock Buybacks Are ‘Plummeting’ in 2019 and Will Drop Further in 2020

Writing in a note to clients, the investment bank noted that S&P 500 share buybacks fell to $161 billion in the second quarter, an 18% slip from the first quarter. Altogether, Goldman estimates that S&P 500 companies will spend $710 billion on share repurchases in 2019, a year-over-year decline of 15%.

To be sure, $710 billion is still a massive number. It would be the second-largest figure on record, trailing only 2018. However, Goldman predicts that corporate buybacks will experience another 5% decline to $675 billion in 2020.

If this trend holds, Wall Street could be forced to once more reckon with a foundational principle: If the stock market’s bull run is going to have any chance to extend further into its second decade, investors need to join the party.