Announcer:
4 Your Money is brought to you by NelsonCorp Wealth Management.
Brandy Auterson:
It’s now time for 4 Your Money. We’re joined by Nate Kreinbrink, financial advisor at NelsonCorp Wealth Management. Welcome back, Nate.
Nate Kreinbrink:
Thanks for having me again.
Brandy Auterson:
A lot of the retail boom and investing seems to have faded some after the first quarter of the year. With less demand on that front, what might that mean for stocks?
Nate Kreinbrink:
Well, cashflows into and out of the markets are important to stock prices. When more money is being put to work by investing in stocks, the tendency is that stock prices continue to move up while money being pulled from the stock market tends to have the opposite effect. Now, with that being said, there are a lot of different groups of market participants. As you mentioned, retail investors are one of these groups and have played outsize roles in various points in market history, most notably in the late 1990s, and then, more recently in the last quarter of 2020, and the first quarter of 2021.
Nate Kreinbrink:
Now, a lot of retail stock investing has quieted down over the past several months and which has caused some concern that markets might be more susceptible to a decline without that sort of cash flowing into the stocks. However, we are watching the amount of stocks that corporations are buying back. And I think we have a chart that goes into this. This chart shows the trailing 12-month buyback of S&P500 companies in dollars. We see that buybacks peaked in early 2019 and have been declining since, with the decline accelerating during the 2020 pandemic, as companies took drastic measures to conserve some cash there.
Brandy Auterson:
Okay. What are you seeing that makes you think that stock buybacks are picking up?
Nate Kreinbrink:
Well, the chart we just looked at showed annual buybacks that still appear to be declining. However, when we look at this on a quarter-over-quarter basis, we have seen buybacks rising notably over the past two quarters. Corporate earnings have staged a huge recovery and are well on their way to topping pre-pandemic earnings per share levels. Now, also, cash and short-term investments on company’s balance sheets are also at record levels. Now, all of these items suggest that companies have a lot of firepower to put towards stock buybacks if they felt that this was appropriate.
Brandy Auterson:
We’ve mentioned retail investing and buybacks as sources of demand for stocks. Now, if larger buybacks don’t materialize, are there any other sources you’re watching?
Nate Kreinbrink:
Yeah. If companies are slow to step up their buyback amounts, it could continue to leave a void in cashflows in the stocks. However, a key source might be foreign purchasers of US stocks. Now, currently, these purchases are at record levels totaling about $26 billion over the last 12 months after being in a downtrend for much of the past 15 years. Now, US stocks have been outperforming most of the world in the past year, and bond yields that remain extremely low could continue to drive this demand.
Brandy Auterson:
If you missed any of our discussion, we’ll make it available for you on OurQuadCities.com.