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Financial conditions, buybacks and ındex performances

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Decisive factors in the evolution of financial conditions… Price pressure will continue into next year, with supply issues being delayed very little. With the bilateral effects of inflation, policy makers began to have difficulty in controlling expectations, within the current asset buying ground. The Fed announced at its last meeting that it was slowing down asset purchases even more. Decreasing asset purchases, ending the QE program earlier (preferably in March), and then evaluating the rate hike bar will be the steps of the Fed. Under current conditions, three rate hikes in 2022 or a Fed that can take even faster steps in the broad term, depending on the situation, would not be surprising.

 

Share buybacks are at record levels… Companies in the S&P 500 repurchased $234.5 billion of shares in 3Q21, surpassing the previous record of $223 billion in 4Q18, according to preliminary data from S&P Dow Jones indices. A wave of stock buybacks helped US stock indices soar to a record high in 2021. The S&P 500 rose 25% this year, achieving 67 record closings. S&P 500 buybacks fell from around $199 billion in 1Q20 to just under $89 billion in 2Q20, as companies hit by the start of the pandemic were beginning to save cash. Share buybacks increased in each subsequent quarter, again approaching $199 billion in 1Q21.

 

Stock market performance… Buybacks are just one of the forces behind the stock market rally. Asset prices continued to benefit from the monetary and financial support policymakers put in place to help the economy weather the pandemic. In the next phases, investors will carefully examine signals from the Fed speeding up the process of closing the bond-buying incentive program. Central bank officials can also shed more light on the rate hike expectations for next year.

 

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Comparison of S&P 500 index performance and buybacks… Source: Bloomberg

 

The impact of buybacks on performance… Buybacks can bolster a company’s stock by reducing the number of shares and increasing its earnings per share. They can also increase investor sentiment by suggesting that executives are optimistic about their companies’ prospects and confident about their finances. While a share repurchase plan would reduce the overall number of shares by suggesting EPS could increase, it is clear that spending will obviously reduce a company’s net earnings, creating a balance between these competitive effects. It is also important here whether the buyback was made below a critical share value or was made under a buyback program.

 

Taxes… Politicians criticize share buybacks who say companies should use cash to invest in their businesses rather than support their share prices. The version of the $2 trillion education, health, and climate spending package that passed TM in November would impose a 1% tax on the net worth of a company’s stock buybacks. The Senate has yet to vote, but the buyback tax has so far generated less institutional opposition than any other tax increase on the bill.

 

The issue of short selling… The US Department of Justice launched a comprehensive criminal investigation into short selling by hedge funds and research firms. People said officials are investigating relationships between hedge funds and firms that post negative reports about certain companies, often with the aim of lowering the stock.

 

Microsoft, Tesla, Apple stock performance comparison. Source: Bloomberg

 

Conclusion? There are still concerns about the Fed’s policy response to rising inflation in the US and how sharply this will tighten financial conditions. Therefore, we will look at the Fed’s aggressiveness in reducing asset purchases. This will also shed light on how manageable inflation expectations are and to what extent they can raise interest rates. Forcing factors are increasing, which may raise questions about the sustainability of the index rally. On the other hand, in an environment where inflation expectations are controlled, growth stocks may continue to be in demand if there will not be heavy shutdowns due to variants. The only difference is that there will no longer be excessively high liquidity. If the need for pandemic support has decreased and companies have no shortage of cash, the absence of QE will not be such a problem. In this environment, it is important for companies to buy back and trust the value of their stocks.

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