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Never a Dull Moment in the Stock Market

December 15, 2021 | Posted in: Investing

This week brought updates to two interesting statistics that help define contemporary stock market behavior. First, in order to divine the direction of the stock market, analysts spend a great deal of time evaluating variables such as the strength of the economy, the direction of interest rates, the outlook for corporate profits, and current levels of valuation. Well, there is another variable that is actually a major determinant of stock market trends. This chart shows the annualized level of stock buybacks versus the S&P 500 Index.

First, note that buybacks and the S&P 500 seem to loosely move together. Second, corporate managers appear to be poor investors in that they cut back on their purchases when the market declines and buy when prices are soaring. I think it is supposed to be the other way around! Finally, the most recent quarter represented an all-time record for share repurchases! This surge could be interpreted several different ways. First, managements could be responding to strong trends in their businesses which certainly is a bullish signal. On the other hand, they could be buying stock because they do not find exciting opportunities to reinvest in the business in the form of capital spending or research and development. Finally, a cynic would argue that executive compensation is heavily skewed to options and other forms of equity which gives management every incentive to support the stock price.
The other interesting statistic is depicted in the following chart which is provided by The Visual Capitalist.

The Decline of Long-Term Investing – Visual Capitalist

This graphic shows the average holding period for a stock on the New York Stock Exchange and it is fascinating to note that is has fallen from eight years in the 1960’s to just 5.5 months in the middle of 2020 which is the last period for which data is available. The right side of the picture provides several possible explanations for this phenomenon.

I’m not sure what all of this means but it confirms the difficult and ever-changing challenge posed by the capital markets.