Record Share Buybacks Shrink (And Supercharge) The Market

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Louis Navellier
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There are a variety of reasons being offered up for the stock market's "melt up" in late August. The announcement of the Mexico trade deal, near record consumer confidence, an upward revision to second-quarter GDP, remarkably stable 10-year Treasury bond yields, and Trump's influence on the Florida governor race, which bodes well for the Republicans in the mid-term elections, are sample reasons.

I could go on and on, but the answer must also include record stock buy-backs. Essentially, at the end of each earnings announcement season, companies tend to announce expanded stock buy-back programs and dividend increases. These stock buy-back programs and dividend increases boosted many of my favorite stocks in late May at the end of the first-quarter earnings announcement season, and they have now done the same thing in late August, at the end of the second-quarter earnings announcement season.

The stock market is actually physically shrinking due to this year's record stock buy-back activity, which may approach a whopping $1 trillion in buy-backs this year for the S&P 500. The full story is available in my management company's new white paper called "Honey, I Shrunk the Stock Market" (click this link).

According to Ed Yardeni, the number of S&P 500 shares has shrunk by 7.7% since the start of 2011. This tends to increase the earnings per remaining share and the dividends available per remaining share.

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Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

Could There be Another September Crash - or Just a Shift in Leadership?

We are nearing the 10th anniversary of the September 2008 crash. September is also the market's worst month, historically. Despite that, we are seeing the best GDP growth since 2000 and the best consumer confidence since 2000. Does this euphoria or complacency indicate a crash or market peak may be near?

I don't think so. In 2000, 54% of the S&P 500 was in seven giant technology stocks and the 10 largest companies in the S&P 500 traded an average of 62 times trailing 12-month earnings. Interestingly, due to a "free float" adjustment to the S&P 500, this bellwether index should not get that concentrated in just a few mega cap stocks ever again. There is no doubt that the FAANG stocks continue to benefit from index investing, but it's not like the top 10 in 2000. When the S&P 500 burst back in March of 2000, the "tail end" of the S&P 500 did better than the mega-cap stocks for several years thereafter. Likewise, today the tail end of the S&P 500, especially the smallest 100 stocks, are posting the best performance this year.

The tail end of the S&P 500 consists of mid- and small-capitalization companies that are more domestic, so they are not impeded by the strong headwind from a strong U.S. dollar. As the index and ETF industry shifts their focus from international, emerging markets, and multinational companies, the amount of index and ETF money now being dumped into the tail end of the S&P 500 (bottom 100) and the Russell 2000 stocks is causing the "melt up" we have witnessed in the past few days. What is even more promising is that there has been minimal trading volume in the past few days, so if the buying pressure picks up, then even more explosive appreciation potential is possible in the upcoming months as trading volume rises.

We could see "flash crashes" at any time, but they are temporary. Last week, I wrote about the third anniversary of the August 24, 2015 Flash Crash and how the stock market can be rigged during market hours, including how stop-loss orders may not provide sufficient protection, and how it is better to buy at the end of the day. In that regard, The Wall Street Journal published a great article last week on how Goldman Sachs now specializes in end-of-day trading for index funds, ETFs, and other passive vehicles.

End-of-day trading has soared in the past several years as passive investing has become more dominant;so I find it a bit ironic that while around-the-clock trading was promoted in the past several years, many professionals have now decided to trade predominantly at the end of the day, when liquidity is much better, when buy and sell orders can be more effectively matched. So if you see the stock market continue to "melt up" at the end of the day and then "gap up" in the aftermarket, that is a great sign that the buying pressure that we have been recently witnessing may be getting even stronger, supporting a bull market.

Consumer Confidence Soars, Reflecting a Healthy Economy

Back in 2000 and 2008, we were entering a recession after a frothy bubble in tech stocks and real estate, respectively. That is not happening today. The economy is strong, earnings are strong, and the market is not in bubble (high P/E) condition. Here is a rundown of the latest run of positive economic statistics.

The best news last week was that the Conference Board announced that consumer confidence rose to 133.4 in August, up from 127.9 in July, reaching an 18-year high, just shy of the all-time record of 135.8 from October 2000. Consumer spending is strong in all income groups, which is why low-end retailer Wal-Mart (WMT) posted its strongest same-store sales in a decade and high-end Tiffany & Co. (TIF) last week announced surprisingly strong 12% annual sales growth in the second quarter for its affluent client base.

The Commerce Department last week revised its second-quarter GDP estimate to a 4.2% annual pace, up from 4.1% previously estimated. One of the interesting details is that corporate profits are up 7.7% in the past 12 months, the strongest annual pace in four years. Exports surged at a 9.1% annual pace while imports declined by 0.4%, so a shrinking trade deficit has also helped to boost overall GDP growth. Overall, 2018 is now shaping up to be the strongest year for GDP growth since 2000's 4.1% growth rate.

The outlier is the housing market. The National Association of Realtors on Wednesday announced that pending home sales declined 0.7% in July, the fourth time in the first seven months of 2018 that pending home sales declined. In the past 12 months, pending home sales have declined 2.3%, so I suspect the Fed will telegraph in its September FOMC statement that it will be slowing its future interest rate increases, since it does not want to kill the housing market or invert the yield curve.

Furthermore, after its September 26 rate hike, the Fed will likely move from "accommodative" to "neutral" and then congratulate itself for hitting its 2% inflation target based on the core PCE.

Disclosure: *Navellier may hold securities in one or more investment strategies offered to its clients.

Disclaimer: Please click here for important disclosures located in the "About" section of the Navellier & Associates profile that accompany this article.

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Louis Navellier profile picture
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Navellier & Associates was founded by Louis Navellier in 1987 and since then has guided thousands of investors by applying our disciplined, quantitative investment process to a broad range of equity products. Every day, investors hire Navellier to manage their assets in a private account, mutual fund, or defensive portfolio. For over 25 years, we’ve been zeroing in on opportunities for long-term growth. We employ a veteran team of investment and client service professionals who deliver exceptional, personal service and industry-leading information to our clients. _________________________________ Important Disclosures that Accompany Navellier & Associates Articles: *Navellier may hold this security in one or more investment strategies offered to its clients. None of the stock information, data, and company information presented herein constitutes a recommendation by Navellier or a solicitation of any offer to buy or sell any securities. Any specific securities identified and described do not represent all of the securities purchased, sold, or recommended for advisory clients. The reader should not assume that investments in the securities identified and discussed were or will be profitable. Information presented is general information that does not take into account your individual circumstances, financial situation, or needs, nor does it present a personalized recommendation to you. Individual stocks presented may not be suitable for you. Investment in securities involves significant risk and has the potential for partial or complete loss of funds invested. One cannot invest directly in an index. Results presented include the reinvestment of all dividends and other earnings. Graphs are for illustrative and discussion purposes only. Although information has been obtained from and is based upon sources Navellier believes to be reliable, we do not guarantee its accuracy and the information may be incomplete or condensed. All opinions and estimates constitute Navellier's judgment as of the date of the report and are subject to change without notice. This report is for informational purposes and is not to be construed as an offer to buy or sell any financial instruments and should not be relied upon as the sole factor in an investment making decision. Any decision to purchase securities mentioned in this research must take into account existing public information on such security or any registered prospectus. Past performance is no indication of future results. FEDERAL TAX ADVICE DISCLAIMER: As required by U.S. Treasury Regulations, you are informed that, to the extent this presentation includes any federal tax advice, the presentation is not intended or written by Navellier to be used, and cannot be used, for the purpose of avoiding federal tax penalties. Navellier does not advise on any income tax requirements or issues. Use of any information presented by Navellier is for general information only and does not represent tax advice either express or implied. You are encouraged to seek professional tax advice for income tax questions and assistance.
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