Buybacks become more dominant

Our main theme in recent years is that we are in another equity bull market driven by debt-fueled stock buybacks. Last Friday, the Fed released its Flow of Funds data for the first quarter of this year, and it showed that buybacks have become even more dominant.

We group the major participants in the stock market into retail, institutional, and companies issuing or buying back stock. Buybacks flattened out at the onset of the pandemic, with retail investors picking up the slack and institutions providing a slight boost.

However, retail investors have flattened out in the last few years, while institutions have resumed their negative bias of the last fifteen years. Thus, all the recent gains in the stock market have come from companies buying back their stock, fueled by U.S. public pensions lending them money through the credit market.

The buyback growth rate slowed in the first quarter, as we predicted, because the growth rate lags stock prices; however, buybacks still became more dominant as they outpaced retail and institutional investors.

Our leading and long-leading credit indicators point toward even more credit-led stock buybacks. Thus, stock prices are likely going to move higher over time so investors, especially institutional ones, should focus on how to outperform an equity bull market.