Bulls “Rush In” With More Stimulus On The Way

I previously discussed how nearly 100% of the net purchases of stock were from corporate buybacks. Share buybacks ARE NOT a return of capital to shareholders. To wit:

“Yes, share purchases can be good for current shareholders if the stock price rises, but the real beneficiaries of share purchases are insiders where changes in compensation structures have become heavily dependent on stock-based compensation. Insiders regularly liquidate shares ‘given’ to them as part of their overall compensation structure to convert them into actual wealth.

‘Corporate executives give several reasons for stock buybacks but none of them has close to the explanatory power of this simple truth: Stock-based instruments make up the majority of their pay and in the short-term buybacks drive up stock prices.’ – Financial Times

The SEC confirmed the same:

‘SEC research found that many corporate executives sell significant amounts of their own shares after their companies announce stock buybacks, Yahoo Finance reports.'”

While this certainly will support higher asset prices in the short-term, it will widen the “wealth gap” long-term.

Yes, Rising Rates Will Matter

“What does it mean for equities if rates and yields do indeed go higher? Fortunately, to the surprise of many, stocks historically do very well when rates increase. Since 1996, stocks gained all 11 times we saw higher rates” – LPL Research, 2018

That was a quote from my article in May of 2018. Expect over the next several weeks to hear a regurgitation of that idea as the media encourages individuals to chase asset prices higher. However, as I noted then:

“The point is that in the short-term the economy and the markets (due to the current momentum) can  DEFY the laws of financial gravity as interest rates begin to rise. However, as rates continue to rise they ultimately act as a ‘brake’ on economic activity.”

Notably, the claim that higher rates lead to higher stock prices falls into the category of “timing is everything.”  As shown below, just a few short months after LPL’s comments that higher rates don’t matter, the stock market fell by 20% between October and December.

However, that was not an isolated case. Throughout history, increases in interest rates negatively impact equity prices. It is just the function of “time” until “something breaks.”

While the markets and economy may seem to perform okay as rates rise initially, the eventual negative impact leads to losses in investment capital.

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