Chat with us, powered by LiveChat

Goldman: Stock Buybacks Plummet, Corporate Spending Down--A Recession Warning?

Print Friendly, PDF & Email

When the future of the economy looks uncertain, businesses rein in their spending. And when businesses stop spending, the supply chain gets hurt.

It’s pretty simple and straightforward.

According to a recent note to clients, Goldman Sachs warned that companies are tightening their purse strings.

As part of the efforts toward tightening companies, according to the note, are significantly reducing, if not halting altogether, their stock buybacks.

This is a big deal if your portfolio consists mainly of equities.

As we’ve been mentioning throughout the entire run-up of the current bull market, share repurchases have played a key role in the bull market--the longest in US history, in fact.

These repurchases boosted stock prices long before the retail investment crowd jumped in.

Stock buybacks may not be the most popular of all uses of corporate capital (unless you’re a stock investor, that is), as one would argue that capital might be better spent on corporate infrastructure and investment.

Besides, stock repurchases can obscure the value of a company: revenues can be so-so, but if a company’s stock is moving higher, investors who aren’t in-the-know may have a false impression that the company is doing better than it really is.

But one can also argue that the current bull wouldn’t be what it is today without the buybacks.

Now that these repurchases are plummeting, the impact this may have on stocks can be huge.

In Q2, S&P 500 buybacks were down 18% from the first quarter of the year. Year-over-year, buybacks are down 17%, according to Goldman.

More importantly, they see this decline in stock buybacks as a trend that will continue well into 2020.

But aside from plummeting repurchases, all corporate spending is down (according to Goldman, it’s the sharpest decline since 2009).

They also noted that CEO confidence has also plummeted to levels not seen since the 2008 financial crisis.

This shouldn’t surprise anyone, considering the ongoing trade war and slowing global growth concerns which have been weighing on the market for quite some time.

Goldman also cited a recent study from Duke University in which a large majority of CFOs were expecting a recession to fall on the US economy in 2020.

So What Might This Mean for You?

There are very few expectations for the Federal Reserve to rein in the interest-driven punch bowl in the next few FOMC sessions--in fact, the market is expecting the Fed to continue easing monetary policy.

But interest rates aren’t the only thing holding up high stock valuations--corporate buybacks have a lot to do with it.

Add to this the reduction of corporate spending, wherein businesses stop expanding (at least in terms of infrastructure) which can cause the economy to slow.

If the Fed isn’t taking away the punch bowl, then arguably, corporations are.

If companies aren’t expanding, and if they’re not supporting the price of their own shares, then what’s left to uphold investors’ stock portfolios other than other investors?

And why would investors continue buying shares of companies when those very companies are contracting (spending-wise) due to a heightened sense of economic uncertainty?

It may be time for you to seek growth opportunities elsewhere while protecting your wealth by investing in safe-haven assets.

Does this mean you should sell everything and go to cash? Of course not.

The purchasing power of cash may be affected by the Fed’s new round of QE (inflation). Besides, the bull market isn’t over yet, but there’s no predicting when the bear will come in and maul the exuberance.

You’re not stuck between the options of losing out (on the bull) or losing everything (to the bear). Spread your assets, and your risk, wide.

If you are overweight stocks, then spread them out to include investment-grade bonds (for fixed-income), physical gold and silver (to protect your wealth from purchasing power erosion), and cash (to deploy to stocks, bonds, or precious metals, wherever necessity or opportunity presents itself).

But don’t fail to act! For if your portfolio gets caught overexposed to the next bear market or recession, or if you miss out on any growth opportunities in any of the markets, you will ultimately be responsible for missing the boat.

On the brighter side of things, if you do hedge and diversify, you may experience growth while stocks are falling, you will generate investment income while the economy slows, you will protect the value of your money while the Fed increases the money supply, you’ll likely catch the next bull market in stocks, and you will have plenty of cash on the side to invest more into any asset that promises growth.

Bank Failure Scenario Kit - sm2



  • This field is for validation purposes and should be left unchanged.

All articles are provided as a third party analysis and do not necessarily reflect the explicit views of GSI Exchange and should not be construed as financial advice.

Precious Metals and Currency Data Powered by nFusion Solutions