One of the benefits of retiring from observing the markets is you get to retire from observing the markets! Hence, my decidedly lack of such contributions to this blog. Anyway, those of you who are in contact with me will know I’ve had other things on my mind that are vastly more important than a few basis points here or there.
But, what the heck, let me step back in with the stock market edging at new highs and the yields on Treasuries reversing course to rather low levels and the Fed now in easing mode.
Someone’s got this wrong; I don’t think both markets can be right.
I get bonds. The economy is at the tail end of a very long recovery, there is immense political uncertainty in the wings, and despite that long recovery wage gains remain disappointing which means inflation continues to be tame. And if you look at the rest of the world’s bond markets — where Europe and Japan’s yields are negative still — US yields look pretty good.
The implication is that it’s stocks that are wrong. What follows are some of the charts I’ve used or borrowed in updated form to offer some explanations as to why the rich stock markets concerns me.
Consider the Wilshire 5000 Total Stock Market index as a % of GDP. A bit high, no? The bottom line here is that stocks are outperforming GDP, which tells me stocks are not a great indicators of ongoing growth, not when they get out of hand.
This next one is of the market capitalization of FAANG (Facebook, Apple, Amazon, Netflix and Google) and FAANG and Microsoft and Info Techs as a % of the S&P 500. To wit, FAANG stocks alone account for 13.3% of the S&P 500. Just five stocks are that much of that market. Add in Microsoft and the figure is 17.6%!! Think about that; just six stocks are nearly 18% of the S&P. Concentrated is the idea here. Info Tech is about 22% , which starts to rival past peaks. I like my markets to be more diversified.
Such concentration is one factor. Another is simply that people are stupid. Not all people mind you, and not just the 40-odd, very odd, percent that think the Trump Administration is a good thing for America and our culture. In this case, however, I mean those who think the stock market is a good proxy for the economy.
The next two charts tell a very compelling story. What you see is simply the total amount of shares in the S&P 500 out there, or outstanding as the professionals would say.
What you see is that there are a lot fewer shares out there compared to eight years ago; in fact there are about 25 billion fewer shares or nearly 10% of the S&P 500. No wonder earnings PER share look better. Behind that phenomenon are share buybacks. Corporate America has taken full advantage of low yields and tight credit spreads to issue debt and use that debt to buy their own shares, boosting share price via the simplicity of supply and demand. (The graph after that shows the change on a quarter-by-quarter basis.)
Remember that these buybacks were financed meaning debt was raised to pay for the shares. What debt wasn’t used for were things like investment and capital expenditures that would presumably boost productivity and thus incomes for workers. The problem is that all that debt is now at a high level relative to GDP. In other words, for 10 years of this recovery corporations haven’t seen the optimism that would provoke investment for expansion but rather the financial incentive to boost share prices in an otherwise call it tepid recovery. Shareholders have done well, especially the sort of shareholders, like CEOs, who make the buyback decisions because they have nothing better to do with the cash they raised.
Politicians can point to the stock market price to say things are doing well. The truth lies elsewhere, however, as we’ve borrowed from tomorrow to pay for things today. Consider the next chart of corporate debt as a % of GDP at 47%. That’s a record high. Note where that stood prior to past recessions.
I’ll make a judgment call here. Given the magnitude of buybacks and the performance of stocks in response, it seems the need for lower corporate taxes was limited. Tax receipts should fall in a recession; we all suffer. But falling this much in prosperity? It would be like the US Government borrowing a lot when things are good instead of paying off debt so there’s room to borrow when things are bad. Imagine such logic!
Lastly, I’ll pull an old rabbit out of my hat to show that stocks haven’t done so well for everyone. Below displays the number of hours the average person needs to work to buy a single share of the S&P 500. That’s 126 hours and pretty much a record. This is to say the average Joe is working an awful lot to keep up with the people whose companies are buying their shares.