Five trading days to go and 2018 will wrap up and investors on Wall Street are looking around and wondering where did the loot go?
Buybacks and dividends look topping $US1 trillion by December 31 and yet it is highly likely the S&P 500 will be down close to 8% in the same time, and the fall including dividends is down around 6%.
Yes, there was a lot of money sloshing around Wall Street, but it has ended up being a complete waste of time for far as enriching shareholders by way of rising share prices where the prices of hundreds of companies on the world’s key index are down 20% or more (and in the grip of The Bear).
Figures show that the proportion of S&P 500 stocks down at least 20% year-to-date has hit its highest level since the GFC back in 2008.
As of December 21, 266 S&P 500 stocks were down by a fifth since the end of 2017. This is on track to be the highest proportion since 2008, when almost 66% of the index suffered a fall of 20% or more, which is the definition of a bear market.
Donald Trump’s great tax largesse gave corporate America and their rich mates what they wanted – but not financial markets.
According to S&P Dow Jones indices American companies bought back a record $US536 billion up to the end of September which included $US203.8 billion in the third quarter alone (which was a record quarterly figure by itself).
US companies have paid out another $US336 billion in dividends so far this year and if 4th quarter buybacks top $US230 billion by the end of this month, and dividends come in around $US90 billion then the total value of capital management moves by corporate America will easily top the $US1 trillion level – which will be another all time high.
These buybacks haven’t only been driven by the best business conditions for years – the buybacks and higher dividends have been substantially financed by Donald Trump’s tax cuts including repatriated savings from overseas, rather than more debt.
Talk about paltry (or more crudely – p@$$-poor) returns for a year that promised so much 12 months ago. Analysts are now asking what happened.
The once mighty FANG stocks tell the underlying tale – from the mighty – for the first time ever two trillion dollar stocks in the shape of Apple and Amazon – the five megatechs are now shrunken versions of their once mighty selves.
The Fangs are Facebook, Apple, Amazon, Netflix and Google (Alphabet).
Amazon’s value fell under $US700 million on Friday for the first time in eight months. Amazon’s market has dropped to $US682.6 billion, to make the company only the fourth largest in the US.
On September 4 its value briefly topped the $US1 trillion level, so its fall has been more than 30% (really bearish). Alphabet (Google) shares are down around $US690 billion and down around 23% in the past three and a bit months. Amazon shares are still up just under 20% for the year, but that was oh so long ago.
Apple shares are down 35% from its high of more than $US1.06 trillion and it is now the second most valuable company in the US and world at around $US728 billion. Microsoft is the most valuable with a market value of around $US765 billion.
Its shares are down more than 14% in the past three months, but are up more than 14% for the year to date.
Incidentally ,shares in Warren Buffett’s Berkshire Hathaway have outperformed those of Apple, even though Berkshire is Apple’s single largest shareholder.
Berkshire shares are down 13.8% from their peak in September and are down 2.7% year to date (better than the S&P 500 plus dividends at around 6%). Apple shares are down nearly 11% year to date.
Facebook shares though have taken a pounding – down 42% from its high with a market value of around $US383 billion and looking increasingly vulnerable.
Netflix, the streaming video giant, has suffered almost as much as Facebook, with its shares down 41% since its peak. But unlike Facebook, Netflix’s shares are still up 28% for the year (Facebook’s shares have fallen 29% year to date in 2018).
For analysts with long memories, the big falls suffered by these megatechs have been seen before in the tech and net booms of the late 1990’s, in the net booms up to the GFC and in previous booms in the 80’s and 70’s. Overstretched valuations get these giants in the end and quite often see them slide by more than is rational.
But when a sliding stockmarket (and overshooting on the downside) will continue when you look at a toxic combination of fear, worries about the stability of Donald Trump, fears the great post GFC rebound slowing to a halt next year, and a tantrum by Wall Street investors not wanting to face up to reality.
The yield curve for US bonds is now close to inverting (shorter rates being higher than longer term rates, say 10 years), historically a precursor of economic downturns.
That’s not only economic, but political as investors start worrying about the stability of the US government as a whole in 2019.
The Financial Times reports that “almost every main asset class and investing style has suffered losses in 2018, something that has only happened twice in the past half-century: during the 1970s era of stagflation and the global financial crisis.”
“Both equities and corporate bonds are now pricing in a recession next year, according to JPMorgan, while cash is looking attractive for the first time in more than a decade.
“It is likely no coincidence that global central bank stimulus is now turning negative for the first time since the financial crisis,” the FT explained.
The Fed spooked markets last week by lowering its forecast for interest rate increases in 2019 to two from three. But investors say the central bank ignored the febrile markets and down went share prices again (and commodities).
And yet it’s not the role of the Fed to steady or smooth markets or talk to them nicely – remember what the Fed did under Paul Volker in the 1970’s when the US central bank crushed inflation eventually and battered markets with it, which then rebounded strongly. Central banks are not there for the benefit of markets and those in it.
But a trillion dollars from a record level of buybacks and higher dividends confirms that it takes more than a sugar hit of cheap, one off cash to sustain sharemarket values.
