Optimism is Close to Its Historical Average

April 04, 2019

Even with this week’s big rise, optimism is close to its historical average. While the rebound in stock prices is encouraging to some individual investors, others have concerns about its sustainability. Many individual investors are monitoring trade negotiations. Also having influence is Washington politics (including President Trump and Democratic control of the House of Representatives), corporate earnings, the Federal Reserve, valuations and concerns about the pace of economic growth.

02-13-2019 SPY

Buybacks have been put back into the spotlight with some disapproval. Earlier this week, Senators Chuck Schumer and Bernie Sanders wrote in the New York Times attacking share repurchases. Among their accusations were stock buybacks mostly benefiting the wealthy and diverting money from being spent on capital expenditures, salary increases and other worker benefits.  

It’s not the first time that buybacks have been criticized, and I doubt it will be the last. Using buybacks as a scapegoat is an easy soundbite used to score political points. The reality about share repurchases is more complicated. If you invest in stocks, you have some wealth, at least enough wealth to set aside money for a period of time before it needs to be spent. While the affluent own more stocks, anyone who invests in the stock market benefits when share prices rise; thus, attacking buybacks because it makes the affluent wealthier is misplaced criticism. Yes, the person with a $2 million or $20 million portfolio realizes a greater increase in wealth, but those with equity exposure of $2,000 or $20,000 also benefit when buybacks boost share prices.

The benefit from stock repurchases is indirect. A direct benefit would be receiving cash because you sold your shares to the company conducting the repurchase program. When buybacks occur on the open market, the odds of you or me directly selling to the company are very slim. The most likely occurrence is us selling our shares to another investor. This means our ownership interest increases relative to the reduction in the number of shares outstanding. Put differently, our slice of the ownership pie gets a little bigger. Additionally, since there are fewer shares outstanding, the laws of supply and demand work in our favor.

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