S&P 500 Would Be at 2,300 If It Weren’t Massive Stock Buybacks
Last August, the U.S. bull market officially became the longest in history at 3,453 days and counting. It would take another five months or so before the S&P 500 Index and Nasdaq entered a bear market, which is defined as a drop of 20% or more from a previous high.
Investors concerned that the market is running into valuation risks have intuited the environment correctly, according to recent data from Ned Davis Research. As it turns out, the S&P 500 Index would be about 19% lower if it weren’t for companies buying back their own shares in huge numbers.
Buybacks Power Bull Market
A breakdown of the S&P 500’s performance between the first quarter of 2011 and the first three months of 2019 reveals an important, yet overlooked, trend: share repurchases have been a major driver of the bull market. Over that period, net buybacks have equaled roughly $3.5 trillion.
“Without focusing too much on numbers, we can say that the S&P 500 index would probably be lower today if not for buybacks versus other uses of cash,” Ned Davis Research wrote in a note last month, according to CNBC.
Without this massive buying spree, the large-cap index would be 19% lower than its Q1 2019 levels.
The S&P 500 Index rounded out the first quarter at 2,834.40. Excluding the share buybacks, the index would be valued just under 2,300.
Buybacks have faced scrutiny from both sides of the political divide, with Republicans and Democrats looking to limit such behavior. They argue that buybacks merely inflate stock values and allow corporate executives to reap higher bonuses.
Return of the Bull Market
After a devastating fourth quarter, the U.S. stock market rounded out its best start to a year since 1998. This allowed the S&P 500 Index and Nasdaq to return to record highs, a feat that would have seemed highly unlikely around Christmas.
The major indexes have lost some of their luster over the past month as a trade-war escalation between the United States and China drove investors away from riskier assets. The trade war has not only magnified the political divided between the two superpowers, it has raised the risk of a more protracted slowdown in global economic growth.
The U.S. economy surged in the first three months of 2019 but now looks poised for a soft landing following a string of dismal economic reports for the month of April. Consumer spending, factory activity and housing sales have all declined at the start of the second quarter.
Nevertheless, the S&P 500 Index is only 4% away from record levels. The resolution of the trade war could send stocks surging again. A new trade agreement appears highly unlikely in the short term, but the pace of negotiations has been known to change rapidly.
How dangerous is 2,800 for the S&P 500 Index? Read to find out: Does this Chart Spell Doom for the S&P 500 Index?
Investors should keep track of negotiations ahead of next month’s G20 summit in Osaka, Japan. That’s when President Trump and China’s Xi Jinping are expected to meet again.
Featured image courtesy of Shutterstock. Chart via Stockcharts.com.