Some reasons why we’re experiencing a wonderful bull market are well known: high corporate profits, abundant nearly-free credit, unattractive alternatives (globally, nearly $11 trillion worth of bonds are trading on negative yields).
A less-noticed driver has been shortage of stock.
Companies are taking shares off the market much faster than they’re issuing new stock. Since the financial crisis, buybacks have been the biggest single source of demand for American equities. Goldman Sachs estimates firms repurchased about $570 billion of their own shares this year, will do even more this year.
Another factor is the growth of passive investing. Money is pouring into exchange traded and index funds. It goes into equities, but increasingly investors are reluctant to cash in. They’re saving for the long term, for retirement, so they’re buy-and-hold investors. Fewer shares are being recycled back into the market by funds.
Commentator Robin Wigglesworth warns that the scarcity theory does rest on uncertain foundations. If the stock market does suffer a severe setback, investors might decide to cash in. “But the overall, long-term trajectory is clear, and the “black hole‟ of passive investing is likely to continue to soak up stocks for a long time to come.”
Here is a link to the full report.
The triumph of the buy and hold strategy is representative of the 2nd psychological perception stage of a bull market. Both share buybacks and passive investing withhold supply from the market which widens the imbalance between supply and demand and contributes to trends becoming more consistent. When this is considered an inevitability rather than a possibility we can conclude the transition in the 3rd psychological perception stage has begun.
We had some friends over to our house last night to play Mahjong and they have never before asked me for investment advice. However, in between games last night one asked what she should do with her Amazon stock, “Can it really continue to go up like it has been?” and “Should I be buying bitcoin”. I can only conclude from this that we are entering the cocktail hour period of this expansion so it is a time to closely monitor the consistency of trends.
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