Stock Buybacks Up 57.8% In Third Quarter

S&P Dow Jones Indices recently reported preliminary dividend and buyback information for the third quarter ending 9/30/2018. On a year over year basis stock buybacks for S&P 500 companies are collectively up 57.8% for Q3 2018. For the 12-months ending 9/30/2018 total buybacks increased 39.1%. Relative to buybacks, dividends increased a much smaller 9.7% resulting in combined dividends plus buybacks increasing by 36.2% for the third quarter. Year over year operating earnings were reported up 25.8%.

The three largest buybacks were initiated by companies in the information technology sector:

• Qualcomm (QCOM): $21.2 billion
• Apple (AAPL): $19.4 billion
• Oracle (ORCL): $10.3 billion

For the quarter the top 20 companies initiating buybacks in the quarter accounted for more than half, or 54.3%, of the total buybacks of all S&P 500 firms.

In conclusion, I would prefer to see larger dividend increases which would be more of an indication that companies expect to see improved cash flow/earnings over an extended time frame. The recent tax cut is not permanent though; thus firms are likely hesitant to commit to higher dividend payments on an ongoing basis. The most significant tax cut expiration impacting businesses might be the phase out of the full expensing of equipment purchases beginning at the end of 2022. At the moment though, companies seem committed to returning to shareholders some of the cash flow benefits resulting from the tax cut.

With Abysmal Investor Sentiment A Market Bottom Might Be Near

Simply noting that the S&P 500 Index is down 12.45% month to date through the close on 12/21/2018, this pretty much sums up the damage inflicted on investors by the market. After a strong start to the year, and following a rewarding 2017, the S&P 500 index had a return of 9.62% through late September. In nearly three short months thereafter, the S&P 500 Index has declined 19.23% from its high, leaving the index down 9.61% for the year through 12/21/2018. This type of market reversal has resulted in investor sentiment turning extremely bearish.

The equity only put call ratio reached 1.13 at Friday's close. Readings above 1.0 represent an extreme bearish reading. The equity market has a tendency to reverse itself when the P/C ratio is above 1.0.

Trading volume on Friday reached a high level last seen in the market pullback in 2011. This high volume level on a down day in the market could signal a capitulation trading day. These capitulation days do not necessarily wash out on a single day; however, it is a sign a market bottom might be near.

The Fear & Greed Index reported by CNN Business is about as low as it can get at '3'. All seven of the components that comprise the Fear/Greed Index calculation are at extreme fear levels.

The NAAIM Exposure Index was reported at 31.96% this week. The NAAIM Exposure Index consists of a weekly survey of NAAIM member firms who are active money managers and provide a number which represents their overall equity exposure at the market close on a specific day of the week, currently Wednesday. Responses are tallied and averaged to provide the average long (or short) position or all NAAIM managers as a group. Institutional money managers have equity allocations at a level approaching those reached during the market pullback experienced in 2015.

Lastly, as this is written, it appears a government shutdown will take place. Charles Schwab notes prior government shutdowns have not had a long lasting negative impact on equity markets as seen below.

This year has been difficult for investors long the market. In a research report I received today it was noted that of 102 Morningstar fund categories, only short term bonds/loans, municipals and one economic sector – utilities – have positive returns this year. We believe recent market action is a correction in a longer-term bull market and continued strong fundamental data will result in a recovery and resumption of this long-term trend, all else being equal, but not without continued market volatility.

Trend In Index Earnings More Important Then A Slowing Rate Of Earnings Growth

One issue strategists are highlighting of late is the fact the earnings growth rate for the S&P 500 Index in 2019 is expected to decelerate from the mid to high 20+% level this year to the mid single digit percentage level in 2019. Some have indicated this slowing earnings growth rate may negatively impact U.S. equity returns next year. Of course the strong rate of earnings growth this year is due in part to the benefit companies have received from the tax cut. In addition to the tax cut benefit though, companies are seeing top line revenue growth in the high single digit percentage level. Although earnings will remain at a higher level due to the lower tax rate, the year over year growth rate in earnings will fall back to a more normalized level next year as the earlier year comparison is a higher number.

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Steep Decline In Bullish Investor Sentiment

The American Association of Individual Investors reported sentiment data for the week ending December 12, 2018. The sentiment survey reported the largest change in the difference between bullish and bearish sentiment since April 11, 2013. The swing in the current week equaled -35.4 percentage points.

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Tight Labor Market A Headwind For Business Sentiment

Although the November NFIB Small Business Optimism Index remains at a high level of 104.8, today's report is the third consecutive decline in the optimism index. The index high of 108.8 was reached in August of this year.

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Investment Fund Outflows Dominate

The most recent flow data for ETF's and mutual funds reported by ICI last week notes outflows occurred in nearly all of the broad asset categories. One exception was a small positive flow into commodity oriented investments.

 Source: ICI

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Trying To Make Sense Of China/US Trade Issues

What seems to be influencing the market the most at the moment is the trade issues with China and the U.S. Jeff Miller who writes at the Dash of Insight blog published a short article yesterday that seems to get to some of the main issues surrounding trade and the equity markets. A couple of highlights from the article follow, but the entire post is a worthwhile read. Jeff notes the market's reaction is,

"a typical example of the trading community’s failure to understand politics, negotiation, and compromise. I have highlighted this before on issues like Greece and the asserted collapse of Europe and concerning various US policy debates."

He notes further,

Here is what to expect:

• Decades of history will not be reversed in a few months. Be happy for some progress.

• The outcome will be a compromise. It will not be a complete success for either side, but each will trumpet what they have accomplished.

• Nothing big will happen until the last minute. This is the way that partisans demonstrate they have accomplished as much as possible.

• Eventual relief on the most important reciprocal tariffs.

• Some progress on the intellectual property issues.

• Some immediate relief on existing boycotts, e.g. soybeans.

The entire post can be read here: China/US Trade – Finding a Signal Amidst the Noise