Leading Indicator For Jobless Claims & Minimum Wage Impact

There is a lot of misinformation on buybacks because they have become a political football. They get the blame for low productivity growth and CEOs making a high amount of money in relation to their production and non-supervisory employees. We’ve even seen the outlandish claim that buybacks are corporations profiting off insider information even though firms announce buybacks before they execute them. Investors can buy stocks ahead of corporations.

Buybacks increased quickly in 2018 as they exceeded capex for the first time since 2007. If buybacks were so terrible for the everyday worker, how come real wage growth improved in the 2nd half of 2018? How come productivity improved in Q4? Stocks fell in 2018, so buybacks don’t guarantee stocks will move higher and form a bubble.

It’s not a surprise, buybacks increased in 2018 because tax cuts provided firms an infusion of cash. Capex increased in 2018, but at a certain point, businesses have no place to put the money so they dutifully return it to shareholders who invest it in other projects. It’s not a sign of bad management that a firm returns capital to shareholders. Investors usually would rather a mature firm give the money back instead of trying to make risky acquisitions while taking on debt. If shareholders wanted to own a risky stock, they would buy one.

Even though buybacks increased in 2018 to above capex, buybacks aren’t out of control. As you can see from the table below, the buyback yield increased from 2.28% to 3.37% in 2018 which is only the highest yield since 2011.

Buybacks were higher as a percentage of income in 2007-2008 and 2015-2016. Those were years of earnings weakness. 2018 was an unusual year where income increased so much, firms needed to return the capital.

Chinese Economy Weakening

China really needs a trade deal with America because its economy is slumping. The government expects GDP growth between 6% and 6.5% in 2019 which would be below 2018’s growth of 6.6%. China’s population growth is a long term issue. Capital Economics believes the labor force population weakness will trim 0.5% off GDP growth by 2030. 15 million babies were born in 2018 which was a 12% decline from 2017. That signals citizens don’t think the economy is strong enough to have kids. Births are falling despite China lifting its 1 child policy in 2015, allowing couples to have 2 kids. Low population growth limits long term growth.

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