Talking Points – December 2021

December 22, 2021 – The Largest Buyer of Stocks

For a number of years large corporations have been massive buyers of their own stock. Admittedly some of this is just to offset the stock options granted to employees. However, many companies are nicely reducing the overall share count, thereby increasing their earnings per share.

In today’s chart, we see that S&P 500 buybacks are now back to record levels after a brief lull during the onset of the pandemic

Source: Wall Street Journal

Despite the notable inflation data, large corporations have been flush with cash, while keeping profit margins near record highs. As a result, they are looking for ways to use cash. Cleary buying back their own shares has been a focal point this year. We prefer to be shareholders of companies with strong and growing cash flow that make sound decisions on how to deploy that cash.

December 14, 2021 – Find Reasons to Sell

Both professional and amateur investors always seem to be looking for a reason to sell stocks. Of course, with today’s 24/7 news cycle and social media there is never any shortage of headlines that could influence an investor. 

It is not just the negative headlines that scare investors though. Sometimes it is those that seem too good to be true and raise concern that a bubble will soon pop. We are reminded of this as Apple’s market cap is nearing $3 Trillion. 

It was just over 3 years ago that Apple became the first U.S. company to cross the $1 Trillion market cap level. There were many that called that a market top signal just like when the tech bubble popped back in 2000. 

However, if we look at this chart of the S&P 500, it is clear that stocks have had an amazing run higher of more than 65% since Apple first crossed that historical level in 2018. 

Apple is simply being used as an example here. We could have chosen other headlines that many thought were a market top. Magazine covers, elections, Covid, Stagflation etc. Eventually something will align with a stock bear market and in hindsight will look correct. However, how does that type of “investing” help an investor if there had already been many other so-called signals before? 

By paying less attention to the noise and focusing more on their financial plan and investment process, investors are less likely to allow emotional headlines to push them to act and more likely to achieve their longer-term financial goals. 

December 8, 2021 – What Do Stocks Do When The Fed Hikes?

The recent modest pullback in stocks quickly raised investor anxiety. It seems many investors were concerned about the emergence of a new Covid variant. While that clearly cannot be ignored, at the same time most institutional investors were more focused on the Fed’s language regarding the pace of reducing stimulus. The liquidity the Fed has provided has been integral to the equity markets massive bull market. How that might change is of extreme importance.

In our chart today, we see that stocks have historically been strong into the first interest rate increase, then had a brief correction, before resuming the uptrend.

There have been many times, including some in just the past couple of decades where stocks continued strong runs even after rate increases began. The Fed these days telegraphs long ahead their intentions, whereas early in our careers it was all kept a secret. Chairman Powell’s recent admission that the tapering of bond purchases might be sped up moved the estimates for the first rate hike to the summer of ’22.

Undoubtedly, the Fed will adjust in either direction as the data arrives, but they will do their best to provide a clear message that does not scare investors.

Source: Greg Towner, CFA, CMT