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Weekly Market Digest: Let’s Talk About Stock Buybacks

This week markets remained volatile as investors digested both last Friday’s Tariff increases by the United States, and China’s subsequent tariff retaliation on Monday.

Markets initially reacted poorly to the escalating tariffs on Monday, but rebounded over successive trading sessions, only to lose steam on Friday – closing marginally lower than the previous week’s close.

No trade deal was reached with China this week, so at least one source of market volatility will remain.

Also on the tariff front, on Friday it was announced that the Trump administration opted to delay a decision on tariffs on automotive imports, while also announcing that an agreement had been made between the U.S., Canada and Mexico to drop a series of tariffs on products moving both into and out of the United States.

Weekly Returns

S&P 500: 2859.5 (-0.7%)
FTSE All-World ex-US(VEU): (-1.6%)
US 10 Year Treasury Yield: 2.39% (-3.12%)
Gold: $1,277.81 (-0.6%)
EUR/USD: 1.116 (-0.6%)

Major Events

  • Monday – Uber Technologies sees its share price decline over 10% on its second day as a publicly traded company.
  • Tuesday – News surfaces that the FAA did not closely review Boeing’s MCAS system during safety assessments. The MCAS system resulted in two Boeing 737 MAX planes crashing earlier this year.
  • Wednesday – President Trump signs an executive order targeting China’s Huawei Technologies, potentially barring the company’s products from being sold in the US.
  • Thursday – President Trump announces impending legislation on a new immigration policy focused on skilled workers, as opposed to individuals with family already in the United States.
  • Friday – The United States, Mexico and Canada announced agreements to reduce tariffs on trade with the U.S.

Our Take: Buybacks

The Wall Street Journal reported this week on ‘booming buybacks’ referring to the multitude of publicly traded companies in the US that have been repurchasing their own shares over the current longstanding bull market.

Share buybacks can signal a number of things to investors. The company may believe their shares are undervalued (a positive message for management to send to investors), or it may not believe it has a more effective manner to deploy existing capital. Maybe the company wishes to increase their ‘earnings per share’, a financial ratio investors utilize as a measurement of company value, to ultimately make their stock more attractive.

It is yet to be seen how all of these buybacks play out. They have been a driver of higher prices in recent periods but when balance sheets are leveraged for buybacks it can lead to volatility in the future recessionary periods.

Of particular interest to me is the reporting by the Journal that indicated that share buybacks hit record highs during early and late 2018, which were both periods where the markets declined in value relatively significantly.

It seems many US publicly traded companies have attempted to take advantage of recent market declines. This ‘buy low’ mentality, if that is in fact what it is, is a strategy Personal Capital employs for our clients on a daily basis.

Volatility, such as that recently driven by trade conflict with China, should be viewed as an opportunity by investors, particularly with diversified portfolios, as it provides a means to purchase positions when they are potentially undervalued. Conversely, upside volatility, or positions increasing in value, present an opportunity to take profit, and redeploy that capital into other areas.

The true trick here, is not market timing by increasing or decreasing overall allocations to stocks, but rather systematically rebalancing to buy low, and sell high, across a diverse set of investments as different parts of the market come in and out of favor.

Read More: Market Commentary

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