Corona isn’t the only virus destroying the U.S economy
One of America’s greatest bull markets ended earlier this month. From the depths of the Great Recessions, the S&P 500 roared, generating ~400% over the last decade before falling victim to the coronavirus. However, corona isn’t the only virus eating away at the U.S economy. A deeper look at the stock market’s rise shows the symptoms have been apparent. America’s largest corporations have built a reputation for capital destruction. If a vaccine isn’t developed, the U.S. economy and our capitalistic system will remain quarantined long after coronavirus is contained.
According to Informa Financial Intelligence, a total of $444 billion has been pulled out of the U.S. equity markets over the last decade. Some of you may be asking how the stock market could go up 400% over the last decade if investors pulled nearly half a trillion dollars. The biggest purchaser of stocks over the last decade has been U.S corporations. In total, S&P 500 companies have spent $4.3 trillion on stock buybacks and $3.3 billion on dividends since 2009- 91% of net income.
S&P companies spent $600 billion on buybacks in 2017. In 2018, following the Tax Cuts and Jobs Act of 2017, companies in the S&P 500 Index spent 68% of net income ($806 billion) on stock buybacks. According to JP Morgan, the proportion of buybacks funded by corporate bonds reached 30% in both 2016 and 2017. With executives focused on short-term stock price fluctuations, research and development (R&D) have been severely neglected. In 2018, only 43% of companies in the S&P 500 companies recorded R&D expenses. Furthermore, 8% of companies accounted for more than 75% of total R&D spending.
One of the main reasons stocks are falling is because corporations no longer have the funds to prop up the market. In addition, studies show that a majority of stock buybacks take place when the stock market is rising not falling. As a result, a majority of companies overpay for their stock- another form of capital destruction. Famed investor Warren Buffet once said, “Only when the tide goes out do you discover who's been swimming naked.” America’s largest companies got caught with their pants off, again. As long as the U.S. government and the Federal Reserve allow unhealthy companies (the virus) to live, the U.S. economy will never be healthy.
-Appo Agbamu, CFA
According to Informa Financial Intelligence, a total of $444 billion has been pulled out of the U.S. equity markets over the last decade. Some of you may be asking how the stock market could go up 400% over the last decade if investors pulled nearly half a trillion dollars. The biggest purchaser of stocks over the last decade has been U.S corporations. In total, S&P 500 companies have spent $4.3 trillion on stock buybacks and $3.3 billion on dividends since 2009- 91% of net income.
S&P companies spent $600 billion on buybacks in 2017. In 2018, following the Tax Cuts and Jobs Act of 2017, companies in the S&P 500 Index spent 68% of net income ($806 billion) on stock buybacks. According to JP Morgan, the proportion of buybacks funded by corporate bonds reached 30% in both 2016 and 2017. With executives focused on short-term stock price fluctuations, research and development (R&D) have been severely neglected. In 2018, only 43% of companies in the S&P 500 companies recorded R&D expenses. Furthermore, 8% of companies accounted for more than 75% of total R&D spending.
One of the main reasons stocks are falling is because corporations no longer have the funds to prop up the market. In addition, studies show that a majority of stock buybacks take place when the stock market is rising not falling. As a result, a majority of companies overpay for their stock- another form of capital destruction. Famed investor Warren Buffet once said, “Only when the tide goes out do you discover who's been swimming naked.” America’s largest companies got caught with their pants off, again. As long as the U.S. government and the Federal Reserve allow unhealthy companies (the virus) to live, the U.S. economy will never be healthy.
-Appo Agbamu, CFA