Stock Market: Last Big Buyer Calls it Quits?

Stock MarketThe biggest buyer of stocks is now pulling back. I’m talking about public companies and their billion-dollar stock buyback programs. After years of record stock buybacks, companies are now pulling back on this controversial and artificial share price support system. This gives credence to my belief that a stock market crash for 2016 is likely.

Long-term readers of Profit Confidential know this all too well. Public companies have been buying back their shares at a record pace. In fact, they’ve been doing this aggressively for five years, choosing to use their cash (and borrowed money) to buy back their shares as opposed to investing in their businesses.

But something very interesting is happening. Over the past four months, public company announcements of stock buybacks have declined by 38%. This is hands-down the biggest decline since 2009. (Source: “Bull Market Losing Big Ally as Buybacks Fall Most Since 2009,” Bloomberg, May 16, 2016.)

The biggest stock buyer is in the market putting on its brakes. But they are not the only stock buyer pulling back.

Between March of 2015 and March of 2016, long-term U.S. stock mutual funds witnessed outflows of more than $200 billion. (Source: “Estimated Long-Term Mutual Fund Flows,” Investment Company Institute, May 18, 2016.) Looking at the weekly data for April and the first few weeks of May, investors in these funds continued to sell.

Stock Market Outlook & Investing 101

Stocks do not rise in price unless there are more buyers than sellers. Finally, we can confirm the buyers are pulling back.

I can’t stress this enough: 2015 was like 2007. Stock indices formed a major top in both of those years. And I believe 2016 will be like 2008—the stock market will start to come down sharply.

With all this said, I want to share three things about investing I have learned over the years:

  1. The time to avoid stocks is when markets are near their all-time highs. The best time to buy stocks is when no one is buying (like March 2009).
  2. Stock market crashes are fast and usually catch most investors by surprise. Losses mount very quickly. And if you get stuck, you could be suffering for a very long time. For instance, stock markets crashed in 2008 and 2009. For investors who bought just before the crash, they didn’t break even until 2013. Those who bought after the stock market crash saw massive gains.
  3. Irrationality rules the market at times but regression to the mean always happens.

At this point in 2016, dear reader, we need to remain very cautious, as a crash could happen at any time.