The rationale for offering multinationals a tax break on repatriation of offshore cash was that they would bring the cash back to the USA, expand their businesses at home, create jobs and stimulate the economy. Apple was in the news for bringing back money in order to pay a $38 Billion tax bill. And other companies are also taking advantage of the changes in the tax law. But, instead of investing to create jobs, they are buying back shares of their stocks. Our question is, what will buybacks do to your investments? Business Insider writes that a record number of stock buybacks could save the market from disaster.
Recent turbulence has derailed the US stock market’s quest to set repeated all-time highs. But equities look headed for a new record of sorts – one that could ultimately be their saving grace.
Companies in the benchmark S&P 500 are on pace to execute more than $800 billion in gross share buybacks in 2018, which would shatter the previous annual record, according to JPMorgan estimates. As a result, the firm says investors should respond by employing a strategy of adding to existing positions during times of market weakness.
The reason is simple: Buybacks have been a safety net of sorts for the stock market through the almost nine-year bull market. Their accretive effect on share prices is a crucial upward catalyst for equities during periods devoid of other positive drivers.
In the short term company buybacks drive share prices higher. This can be a bonus for you the investor. But, the market is otherwise overbought and has just corrected with perhaps more corrections to come. Trump seems intent on starting a trade war. The Wall Street Journal writes that trade concerns are weighing on stocks.
U.S. stocks edged lower Monday, as investors continued to worry that the Trump administration’s plan to impose stiff import tariffs could spark an all-out trade war.
The Dow Jones Industrial Average declined 77 points, or 0.3%, to 24463 in morning trading, while the S&P 500 was down 0.3%. The Nasdaq Composite fell 0.4%.
Investors were trying to gauge the impact of President Donald Trump’s protectionist trade agenda and whether planned tariffs on steel and aluminum imports are the start of a broader policy that could eventually include levies on other products and commodities.
Thus, aside from stock buybacks, there is little to drive the market still higher. What buybacks will do to your investments in the short term is protect you from loss. But, the bull market is wearing thin. We have written about how to protect your investments before the US economy implodes again, three ways to protect your investments in a bear market, and how now is good time to switch your investment focus from growth to value. Buybacks will help you preserve gains for a while but smart investors will see the handwriting on the wall and adjust their investment portfolios by selling part of their holdings on the next uptick caused by a stock buyback and then adjust their investments with an eye toward weathering the coming economic storm.