Analysis: Where are the bulls in this bull market?

Corporations have spent hundreds of billions annually in recent years buying back their own stock. But what if, after netting out all the supply and demand flows in the equities market, the corporations are the only ones on balance buying their stock?

That’s the conclusion, at least for 2016, of Ed Yardeni of Yardeni Research. “The bottom line is that the current bull market has been driven largely by corporations buying back their shares,” he wrote on Tuesday. Mr. Yardeni and his team combed through last week’s release from the Federal Reserve of its quarterly report on the national wealth, the Financial Accounts of the United States. This massive trove of data is a comprehensive tally of every debt that’s been issued, stock that’s been bought, and loan that’s been made.

Mr. Yardeni’s team focused on the numbers relating to the equity market for last year, and drew what shouldn’t actually be that surprising of a conclusion. First, they look at the supply side. “Net issuance of equities last year totaled minus $229.7 billion,” he wrote (you can find figure in table F. 223, if you want to go look). Within that, nonfinancial corporate issuance was -$565.7 billion and financial issuance was $269.7 billion. Of the financial issuance, $283.9 came via equity exchange-traded funds, a record amount (more on that in a moment). “The decline in NFC issues reflected the impact of stock buybacks and M&A activity more than offsetting IPOs and secondary issues,” he wrote.

Those trends have helped fuel what’s been called a “de-equitized” stock market, in which there is simply less publicly traded stock available.

Mr. Yardeni then turns to the demand side. Equity mutual funds have been net sellers (table F. 122). Closed-end funds were net sellers of corporate equities (table F. 123). Equity ETFs were net buyers (table F. 124), in the amount mentioned above ($283.9 billion). Security brokers and dealers? For corporate equities, they were net sellers (table F. 130). Foreign investors (table F. 133)? Net sellers.

To the extent that there’s money flowing into the equities market that isn’t corporate or institutional, it’s just money flowing out of other funds, and into ETFs. Mutual funds still have a far larger amount of assets under management, $9.19 trillion compared to $2.03 trillion. However, and here Mr. Yardeni turns to data from the Investment Company Institute, mutual funds net inflows from March 2009 through January 2017 have totaled just $198 billion. ETFs have accrued five times that total, $1.1 trillion.

“Other institutional investors have been selling equities for the past 24 quarters, i.e., during most of the bull market,” he noted, adding that foreign investors have been net sellers as well.

Will these trends change in 2017? There are signs that inflows into equity funds are returning. Money has been flowing from bond funds into stock funds, a trend started after the election, and that has continued this year.

There have been some signs that corporate issuance is returning, too, now that the cost of issuing debt is rising with interest rates. Equity issuance in the US in the first quarter so far has totaled $55 billion, up from $37 billion in last year’s first quarter, according to Dealogic’s Investment Banking Scorecard.

On the other hand, corporate buybacks are expected to increase as well. Buybacks fell in 2016 from 2015, to $542.1 billion from $694.4 billion, but if corporations get the gift of a repatriation holiday, a one-time window to bring back cash sitting in overseas accounts, it could fuel a 30% rise in buybacks in 2017, Goldman Sachs estimated. In fact, while the pace of buybacks was slow through most of 2016, it, too, picked up after the election, on expectations of that corporate tax holiday.