Have you ever noticed that the stock market seems to have a record high at least once a month? Meanwhile your day to day activities doesn't reflect the financial euphoria felt by Wall Street.
Rising stock market values has less to do with the real world economy with each passing year.
Instead, stock market values frequently rise as a result of Wall St techniques that can raise a company's stock price independently from what is actually going on in the economy.
Besides Wall St. tricks, the Federal Reserve also has the ability to prop up the stock market during times when the economy can easily improve.
Share Buy Back / Repurchasing Stocks
One option a company will take to boost it's stock price is to repurchase it's own shares.
Generally speaking, a company's bottom line is creating a profit and raising value for it's shareholders. Whether or not a company is satisfying consumer demand is not relevant when it comes to buying back their own stock.
Here are a few things I consider when I think of a good economy:
These questions aren't answered when a company has just repurchased it's own stock to give the appearance of a higher stock value.
Big Banks Buy Back Their Own Stocks Also
From the AP article shown above:
Bank of America, Citigroup and JP Morgan Chase bought back up to roughly $17 Billion in stock shares.
That looks good for Wall St reports but doesn't change much for your typical everyday worker and saver.
Stock buybacks are common and have increased in the past few years.
Apple does it.
(Excerpt) 'Although its growth rate is slowing, Apple generates huge amounts of free cash flow. This allows it to continue rewarding shareholders with increasing cash returns, including dividends and stock buybacks.'
The TV station CBS does it.
(Excerpt) 'The announcement comes as some analysts question whether the broadcaster can continue to show the kind of growth that fueled a nearly 15% growth in its stock price so far in 2016. For example, this month UBS Global Research’s Doug Mitchelson downgraded CBS to “sell,” saying he believes TV advertising will lose steam after the Olympics.'
Home Depot seems to be experts at stock buy backs.
(Excerpt) 'So, investors are piling into Home Depot thinking it's a safe place to ride out the recent market volatility. But ironically, they are paying a near-historic multiple for a stock that is being driven by stock buybacks -- financed by debt that will probably become more expensive later this month. Good luck with that.'
I am not commenting on the efficacy of 'stock buybacks' as an investing strategy. Instead, I am making the observation that the financial media places too much importance on a company's stock quote when they claim the economy is strong and healthy.
A company can raise it's stock market value regardless of whether or not they are meeting consumer demand or creating a profit from their day to day activities.
Investors used to pay more attention to real world economic and business signals, they use to put more emphasis on the details of a company's balance sheet before making investment decisions.
Now, instead of real world data, investors wait to see what the Federal Reserve (America's Central Bank) will do.
This NY Times article shows how Wall St. investors will slow down stock market activity until they find out if the Federal Reserve has changed policies regarding interest rates or the creation of new money into the market:
'John Canally, an investment strategist at LPL Financial, expects the market to coast until the Federal Reserve meets next week.
"Basically, we're in a waiting period for the Fed," he said. "Today is probably what you can expect for the rest of the week: a lack of direction."'
Definitely a lack of direction. Rather than looking at a business's ability to efficiently meet consumer demand, among other economic fundamentals. Investors now wait for the Federal Reserve to report if their 'easy money' policies will continue.
'Easy Money' policies are given fancy names like 'quantitative easing' but in reality it is just another debt scheme.
Quantitative Easing Explained
Quantitative easing is an unconventional monetary policy in which a central bank purchases government securities or other securities from the market in order to lower interest rates and increase the money supply. Quantitative easing increases the money supply by flooding financial institutions with capital in an effort to promote increased lending and liquidity.
In normal language, the Federal Reserve purchases debt (bonds, mortgage backed securities, etc.) from financial institutions like big banks, when the Fed purchases this debt, new money is created as an asset into a bank's bottom line.
The purpose of this new money is to allow the banks to lend more to everyday people looking for loans to start businesses or make important big purchases like buying a home.
Quantitative Easing / Stock Market Parallel
Looking at the graph above you notice there is a strong correlation between the growth in the S&P 500 Index and the trillions of dollars created by the Federal Reserve.
Another example of rising stock market value that has nothing to do with the satisfaction of consumers buying products or businesses running efficiently. This kind of stock market growth is propped up by the Federal Reserve purchasing debt and placing trillions of dollars into big banks
Of course many banks didn't increase their lending activity to consumers because the Federal Reserve paid them interest on the newly created money which gave banks a positive cash flow. For more on this issue read this Huffington Post article.
If you invest in the stock market you would be wise to do as much of your own research as possible with the understanding that there is more information needed than just a company's stock price or what the Federal Reserve is doing.
Researching these kind of questions may help you manage the ups and downs of a stock market whose value is easily manipulated by other factors that has nothing with real productive growth. -- Ricky Moore