US equities: more buyers than sellers





If investors wish to buy more than others wish to sell, share prices will tend to rise. It is therefore sensible to look at who buys and who sells and if any changes seem likely.
Up to 1985 US companies issued shares (ie, they were sellers) and since then they have become by far the most important buyer (chart one). As a result the stock market has tended to go up and down as corporate buying has ebbed and flowed (chart two).
Buying peaked with the stock market in 2007 and slowed a bit before the market peaked in 1999. It was not quite as strong in 2013 as in 2012, but is still running at 2.3 per cent of gross domestic product.
US top managements are receiving huge bonuses which are typically linked to earnings per share or the return on corporate equity. This means that buybacks increase their pay and investing in equipment pushes it down. The result is that companies spend less of their cash flow than ever before on capital investment and have increased their buybacks to near record levels (chart three).
As it is in the interest of their managements, I expect companies to go on buying back shares until their cash flows fall off and I don’t expect this to happen soon.

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