Thoughts from Jim Puplava’s recent Big Picture podcast, “Shareholder Yield – Why Stock Buybacks and Dividend Increases Make Sense in a Low Interest Rate World.”
Monetary policy, stock buybacks, and the ongoing shift by global institutions into equities reflect some of the major drivers in today’s market.
Last year the S&P 500 was up nearly 30% with corporate share buybacks up over $500 billion during that time. When you also add in a worldwide shift by central banks into the stock market as well (per OMFIF), it’s not too hard to see why stocks have been able to climb a continual wall of worry.
Given the growing size of central banks’ balance sheets and their relatively low allocation to stocks over bonds, this trend may continue as long as government bond yields remain at all-time lows. We see a similar shift taking place with other major institutions as well.
Public pension funds around the globe face similar circumstances and must find a way to earn a greater return on their assets. These funds have traditionally allocated a much higher percentage of their assets towards safer and lower yielding bonds, but are now having to move into the stock market as well where returns can keep pace with ageing populations. As Reuters recently reported:
“Japan's $1.2 trillion public pension fund, the world's largest, will likely raise its allocation for domestic stocks to about 25 percent, people familiar with the process said on Saturday…Prime Minister Shinzo Abe is pressing GPIF to invest more in risk assets with higher yields and less in domestic bonds that earn razor-thin returns, to meet the growing pension needs of the fast-greying population…
GPIF is likely to cut its Japanese government bond weighting to about 40 percent from the current 60 percent and increase its investments in foreign stocks, the sources said.”
The theme in all of this of course is low rates, with market valuations relative to weakening economic fundamentals (mainly outside of the US) as the main reason cited for why present or higher stock market prices are unsustainable.
Putting aside the buying habits of large global central banks and other institutions, are current stock prices a reason for corporate buybacks to slow down any time soon? No. In fact, valuation levels for many large-cap multinational companies suggest management may consider their share prices to be relatively inexpensive on a historical basis.
Exxon Mobil has been one of the largest buyers of its shares this year. While critics may say this is being done at inflated prices, its valuation levels suggest otherwise:
With 10-year Treasury yields around 2.3%, it is not hard to identify many large-cap stocks that sport higher dividend yields, increasing payout ratios, and historically low to average valuations. Excluding tax-free bonds, dividend income is also taxed more favorably than interest income, which presents an attractive benefit to many investors.
Risks still remain to the global economy; however, leading economic indicators (LEIs) for the US are still expanding and have yet to show signs of rolling over. The Conference Board’s Leading Economic Index below (in red, S&P 500 in black) measures a wide range of economic data across the US and shows the major trend for the economy is still upwards. Until this and other LEIs we monitor begin to weaken or reverse trend, the overall economic backdrop in the world's largest economy remains favorable.
If you would like to listen to this full Big Picture podcast with Jim Puplava, please click here for audio. For a full archive of daily shows with various money experts, please click here.
