Share This Article

Facebook LinkedIn
Twitter Reddit
Print Email
Pinterest Gmail
Yahoo
Money Morning
×
  • Invest
    • Best Stocks to Buy
    • Stock Forecasts
    • Stocks to Sell Now
    • Stock Market Predictions
    • Technology Stocks
    • Best REITs to Buy Now
    • IPO Stocks
    • Penny Stocks
    • Dividend Stocks
    • Cryptocurrencies
    • Cannabis Investing
    • Angel Investing
  • Trade
    • How to Trade Options
    • Best Trades to Make Now
    • Options Trading Strategies
    • Weekly Trade Recommendations
  • Retire
    • Income Investing Guide
    • Retirement Articles
  • More
    • Money Morning LIVE
    • Special Investing Reports
    • Our ELetters
    • Our Premium Services
    • Videos
    • Meet Our Experts
    • Profit Academy
Login My Member Benefits Archives Research Your Team About Us FAQ
  • Invest
    • Best Stocks to Buy
    • Stock Forecasts
    • Stocks to Sell Now
    • Stock Market Predictions
    • Technology Stocks
    • Best REITs to Buy Now
    • IPO Stocks
    • Penny Stocks
    • Dividend Stocks
    • Cryptocurrencies
    • Cannabis Investing
    • Angel Investing
    ×
  • Trade
    • How to Trade Options
    • Best Trades to Make Now
    • Options Trading Strategies
    • Weekly Trade Recommendations
    ×
  • Retire
    • Income Investing Guide
    • Retirement Articles
    ×
  • More
    • Money Morning LIVE
    • Special Investing Reports
    • Our ELetters
    • Our Premium Services
    • Videos
    • Meet Our Experts
    • Profit Academy
    ×
  • Subscribe
Enter stock ticker or keyword
×
5 Ways to Beat the Fed (and Crush Inflation)

Email this Article

Send with mail | ahoo instead.
Required Needs to be a valid email
Required Needs to be a valid email
Brace for a Stock Market Crash as Politicians Sour on Share Buybacks
https://moneymorning.com/?p=1041701
Required Please enter the correct value.
Twitter
Stocks: DOG, PSQ, SH

Brace for a Stock Market Crash as Politicians Sour on Share Buybacks

By David Zeiler, Associate Editor, Money Morning • @DavidGZeiler • May 13, 2019

Start the conversation

Comment on This Story Click here to cancel reply.

Or to contact Money Morning Customer Service, click here.

Your email address will not be published. Required fields are marked *

Some HTML is OK

It's nearly inevitable that Wall Street's addiction to share buybacks will cause a stock market crash - and the 2020 election could be the spark that makes it happen.

The curbing - or banning - of stock buybacks will almost certainly be on the agenda should the Democrats win control of both houses of Congress and the White House in 2020.

But as you'll see shortly, stock buybacks have fueled much of the gains in the bull market of the past decade. New restrictions on them would slash demand for stocks, virtually assuring a stock market crash.

Such restrictions are becoming increasingly likely.

Several prominent candidates seeking the 2020 Democratic presidential nomination have voiced a desire to rein in Wall Street excesses.

Even a mainstream Democrat like former Vice President Joe Biden - who at the moment has a huge lead in the polls over his 21 rivals - has suggested the government "take a look at regulations that promote stock buybacks."

And the topic is a favorite of well-known progressives such as Sen. Elizabeth Warren (D-MA) and Sen. Bernie Sanders (I-VT)...

Stock Buybacks in the Crosshairs

Sanders has been a longtime critic of the practice. In a February op-ed piece in The New York Times, co-written with Sen. Chuck Schumer (D-NY), Sanders derided buybacks as "corporate self-indulgence."

Warren has also long criticized stock buybacks as part of her frequent broadsides on a range of Wall Street practices she sees as greedy and harmful.

"These buybacks were treated as stock manipulation for decades because that is exactly what they are. The SEC needs to recognize that," Warren said in 2015, referencing the 1982 rule change that permitted share buybacks.

She co-sponsored a bill in 2018 that would have limited share buybacks to tender offers, which have more restrictions and require more transparency. Such restrictions would no doubt dampen enthusiasm for buybacks.

In their New York Times piece, Sanders and Schumer proposed a bill that would "prohibit a corporation from buying back its own stock unless it invests in workers and communities first," which would include paying employees at least $15 an hour, among other benefits.

You Must Act Now: America is headed for an economic disaster bigger than anything since the Great Depression. If you lost out when the markets crashed in 2008, then you are going to want to see this special presentation...

But more recent proposals would go a step further...

In March, Warren, Sanders, and fellow candidate Sen. Kirsten Gillibrand (D-NY), signed on as co-sponsors of a bill called the Reward Work Act that would repeal the 1982 rule - and ban share buybacks outright.

This is the sort of "stick it to Wall Street" issue that could gather widespread support among Democrats in the wake of the 2020 election, particularly if they make significant gains.

And bipartisan support for at least some curbs on stock buybacks is not out of the question, either.

In February, Sen. Marco Rubio (R-FL), proposed ending preferential tax treatment for the practice, instead taxing buybacks like dividends in the hope of reducing the practice.

The fact is, any restrictions on buybacks will harm stock prices. A full ban would be disastrous.

You see, the stock market is hopelessly addicted to stock buybacks...

Why a Buyback Ban Would Trigger a Stock Market Crash

While the abundant use of share buybacks is no secret, few investors realize how vital they have been to the stock market rally that started in 2009.

Each year, Goldman Sachs Group Inc. (NYSE: GS) creates a report documenting the annual net demand for stocks from every major category of investor. Net demand means the total shares sold are subtracted from the total shares purchased. The categories include corporations - the source of the buybacks - as well as pension funds, foreign investors, mutual funds, and households (you and me).

The data from the past decade paints a stark picture. Goldman's numbers show that since 2009, corporations are responsible for more than 90% of the net purchases of stocks.

Since 2014, buybacks have accounted for a staggering 120% of net demand. In other words, without buybacks, there would have been net selling in the markets over the past five years - a recipe for a bear market if not a full-blown stock market crash.

Just as ominously, the nearly $5 trillion spent on buybacks since 2009 has artificially inflated earnings per share, making soaring stock prices appear justified.

The website Advisor Perspectives did the math on the impact of buybacks on earnings over the past decade. While sales increased just 53%, earnings zoomed 380%.

And the dependency has grown deeper over the past couple of years. The annual spend on share buybacks has increased from about $400 billion in 2012 to $806 billion last year. When companies are suddenly forced to go cold turkey, a stock market crash is practically unavoidable.

But even if the Republicans manage to block any political action against stock buybacks, another issue looms as a threat. It would have just as negative of an impact, too, severely reducing the ability of companies to buy back their shares.

And the chances of it happening are even higher...

This Ticking Time Bomb Will Blow Up Share Buybacks

Join the conversation. Click here to jump to comments…

David ZeilerDavid Zeiler

About the Author

Browse David's articles | View David's research services

David Zeiler, Associate Editor forĀ Money MorningĀ at Money Map Press,Ā has been a journalist for more than 35 years, including 18 spent atĀ The Baltimore Sun. He has worked as a writer, editor, and page designer at different times in his career. He's interviewed a number of well-known personalities - ranging from punk rock icon Joey Ramone to Apple Inc. co-founder Steve Wozniak.

Over the course of his journalistic career, Dave has covered many diverse subjects. Since arriving atĀ Money MorningĀ in 2011, he has focused primarily on technology. He's an expert on both Apple and cryptocurrencies. He started writing about Apple forĀ The SunĀ in the mid-1990s, and had an Apple blog onĀ The Sun's web site from 2007-2009. Dave's been writing about Bitcoin since 2011 - long before most people had even heard of it. He even mined it for a short time.

Dave has a BA in English and Mass Communications from Loyola University Maryland.

… Read full bio

Login
guest
guest
0 Comments
Inline Feedbacks
View all comments
LIVE
Visit Money Morning Live


Latest News

January 19, 2023 • By Money Morning Stock Research Team

These Stocks Could Go To $0

January 9, 2023 • By Money Morning Stock Research Team

The Government Is Pouring $391 Billion Into These Stocks - Buy Now

December 27, 2022 • By Money Morning Staff Reports

6 IPOs in 2023 You Can’t Afford to Miss
Trending Stories
ABOUT MONEY MORNING

Money Morning gives you access to a team of market experts with more than 250 years of combined investing experience – for free. Our experts – who have appeared on FOXBusiness, CNBC, NPR, and BloombergTV – deliver daily investing tips and stock picks, provide analysis with actions to take, and answer your biggest market questions. Our goal is to help our millions of e-newsletter subscribers and Moneymorning.com visitors become smarter, more confident investors.

QUICK LINKS
About Us COVID-19 Announcements How Money Morning Works FAQs Contact Us Search Article Archive Forgot Username/Password Archives Profit Academy Research Your Team Videos Text Messaging Terms of Use
FREE NEWSLETTERS
Total Wealth Research Power Profit Trades Profit Takeover This Is VWAP Penny Hawk Trading Today Midday Momentum Pump Up the Close
PREMIUM SERVICES
Money Map Press Home Money Map Report Fast Fortune Club Weekly Cash Clock Night Trader Microcurrency Trader Hyperdrive Portfolio Rocket Wealth Initiative Extreme Profit Hunters Profit Revolution Warlock's World Penny Nation Quantum Data Profits Live Trading Alliance Trade The Close Inside Money Trader Expiration Trader Vega Burst Trader Flashpoint Trader Darknet Hyper Momentum Trader

Ā© 2023 Money Morning All Rights Reserved. Protected by copyright of the United States and international treaties. Any reproduction, copying, or redistribution (electronic or otherwise, including the world wide web), of content from this webpage, in whole or in part, is strictly prohibited without the express written permission of Money Morning.

Address: 1125 N Charles St. | Baltimore, MD, 21201 | USA | Phone: 888.384.8339 | Disclaimer | Sitemap | Privacy Policy | Whitelist Us | Do Not Sell My Info

wpDiscuz