Over the weekend we showed a chart which demonstrated that the bulk of the 21st century has been characterized by equity retail fund outflows offset by a tsunami of bond inflows, i.e. a reverse “great rotation.” The chart also illustrated that periods of “big bond inflows often preceded big policy changes”, hinting that some major event was coming; meanwhile big bond outflows (e.g. 2008/13/18) tended to coincide with the most bearish returns across asset classes, which may explain why in a time of record bond inflows, i.e., right now, stocks are trading near all time highs…
… even if it did – as we said on Sunday – pose a question: “just who is buying stocks here?”
Now, in his latest Flow Show weekly report, BofA CIO Michael Hartnett confirms that the flows continued for one more week, as another $11.4 billion flowed into bonds, while $8.4 billion was redeemed from stocks (a clear sign investors are not worried about bond bubble for now, with chunky inflows to both IG ($7.9bn) & govt bond ($3.5bn) funds).
More importantly, when looking at the bigger picture and finding $213 billion in redemptions from equity funds stands in stark contrast to $337bn inflows to bond funds; Hartnett answered our pressing question: who is buying stocks here?
His answer: “the sole buyer of US stocks remain corporate buybacks, not institutions” as shown in the chart below.
This is notable not only because it means that without the buyback bid (made possible by record cheap debt, which is used to fund corporate stock repurchases) stocks would be far, far lower, but because it is a carbon copy of what we observed almost exactly two years ago, suggesting that between the summers of 2017 and 2019 absolutely nothing has changed.
Meanwhile, as Credit Suisse notes, one of the major features of the US equity market since the low in 2009 is that the US corporate sector has bought over 20% of market cap, while institutions have sold 7% of market cap.
Why this rush by companies to buyback their own stock, and in the process artificially boost their Eearning per Share? There is a very simple reason: as Reuters explained some time ago, “Stock buybacks enrich the bosses even when business sags.” And since bond investors are rushing over themselves to fund these buyback plans with “yielding” paper at a time when central banks have eliminated virtually all yield and risk, who is to fault them.
More concerning than the unprecedented coordinated buybacks, however, is not only the relentless selling by institutions, but the persistent unwillingness by “households” to put any new money into the market which suggests that the financial crisis has left an entire generation of investors scarred with “crash” PTSD, and no matter what the market does, they will simply not put any further capital at risk.