One of the most frustrating things for investors to see today is that, despite the fact that the US economy is rapidly heading towards recession, stock markets remain at unusually high valuations. While those investors who have already invested in gold to protect their assets are happy about gold’s performance, especially as stocks have plateaued in recent months, they’re still puzzled to see stocks not dropping like everyone knows they’re going to. Why is that?
As with much of the stock market’s performance over the past several years, its continued high levels are due to one thing: corporate stock buybacks. You would think with the economy headed towards recession and a sure stock market crash that companies would cease their stock buybacks, but that’s not the case. In fact, corporate stock buybacks may reach record levels this year if they keep up this pace through the rest of the year.
Corporations are getting the money for these buybacks from the debt they’re issuing. Thanks to the Federal Reserve’s recent interest rate cuts, corporate debt interest rates are also declining, leading corporations to issue record amounts of debt recently. And that’s keeping the stock buybacks going.
Why are investors continuing to buy corporate debt? For one thing, it’s because stock markets have plateaued and investors are looking for any yield they can get. So in other words the plateauing stock markets are leading investors to buy corporate debt, the money from that debt issuance is used to buy back stock, which keeps stocks plateaued, which encourages more investors to buy corporate debt, etc. It’s a vicious circular cycle that won’t stop until stocks crash, corporations stop buying stock, or investors stop buying corporate debt.
The question then becomes when any of those will happen. In all likelihood all of those will happen all at once. As we saw in the overnight repo market recently, bond markets are at very high risk of freezing at very short notice. All it will take will be a little bit of nerves or anxiousness for investors to start shying away from corporate bond purchases. That then will defund corporate stock buybacks, which will lead to stocks falling from their currently high levels.
Investors may hate the waiting game, but at this point it’s just a matter of when, not if, stock markets will crash. If they’ve taken the right steps to safeguard their retirement savings, investors who’ve gotten out of stock markets and into gold are sitting pretty right now and should have nothing to worry about.
This article was originally posted on Goldco.
