There has been so much hype claiming that we are teetering on the brink of a major market crash. I recently ran across one scare video that is so over the top in its fear-mongering that it borders on caricature.
It goes like this:
Cue scary music. Introduce a picture of a gentle lamb. Add voice-over and menacing drum beats.
Narrator: “Take a good look at this lamb. He’s a happy, innocent little lamb. He always has food to eat. He has shelter to keep him out of harsh weather. And he doesn’t have to worry about predators.”
Okay, so why the foreboding music? Keep listening.
Narrator: “So, when this innocent lamb and his heard are invited by those they trust to take a walk, he simply follows the crowd and suspects nothing. Yet it will be the last walk of his life. Because within the next few seconds, unsuspectingly, this happy, innocent little lamb will be slaughtered.” Yikes!
Here’s the supposed lesson of this horror story: We investors are the lambs, and a tremendous market crash will be our undoing. Oh, and the person behind this video wants you to buy his newsletter.
This video claims that a $5.1 trillion “financial time bomb” will soon cause the Dow to fall 70% and cascade us into a second Great Depression. When? Beginning on September 1, according to the video’s narrator. Kind of sounds like the doomsday prophecies, doesn’t it?
The narrator focuses on a $5.1 trillion “Secret Buyer” of stocks that is alleged poised to pull back on its acquisition of stocks. The way it’s presented, you’d think the Illuminati was in the business of investing.
But no, it’s not nearly that dramatic. The “Secret Buyer” turns out to be the many corporations that have been buying back their own stock in recent years.
Why on earth did I bring this video up? Because it’s the first viral stock market clip I’ve seen since the “end-of-America” ads back in 2012 – 2014, and I don’t want investors scared out of their minds and heading for the hills. And while I don’t want to give the video too much credence, I do want to talk about stock buybacks and the current $5.1 trillion they represent in our national economy.
Now, I’m no Pollyanna. But, I am positive and rational in my views on how the economy is faring. And I’m not saying I think we won’t have a recession in the next handful of years or experience a pullback at some point, but I just don’t agree with the reasoning behind this video.
As a refresher, companies are allowed to buy their own stock back. Rule 10B-18 of the Securities and Exchange Commission (SEC) provides a “safe harbor” for companies and their affiliated purchasers when the company or affiliates repurchase the company’s shares of common stock. This means they will not be deemed to have violated anti-fraud provisions of the Securities Exchange Act of 1934, so long as the repurchases fall within the four conditions of the rule.
This video uses the oldest form of fear-mongering in the book: Find one item that most people don’t really understand (who reads SEC law for fun?), and say it’s the levy that’s holding back massive destruction while claiming that it’s all about to break. No, no and no.
First, while there has been legislation introduced in the House to repeal Rule 10B-18, there is only a minuscule chance it will pass the House, then the Senate, and then be signed into law by President Trump. It would literally take an act of Congress to put this overhaul in place.
Second, there’s no evidence that if the bill does pass that it would crater the market. To the contrary, from 1936 until 1982 (before the SEC buyback law was enacted), the S&P 500 went up 9.5% per annum without stock buybacks.
So, if we find ourselves with a repeal of the buyback law, companies will still have the same dollar amount of earnings, and they still have to do something with the massive profit they have. This will likely translate into investing more in cap-ex and expanding by paying more dividends, reducing debt, increasing wages, and decreasing prices to become more competitive. These are still all the positives that come from companies generating profits.
And finally, the reasoning behind the proposed new law is that corporate tax reform has had little positive impact on the average American. But this logic is flawed. Almost 50% of the money the average corporation has gleaned from tax reform will go to bonuses, increased wages, research and development, lower prices for consumers, charity and new job creation.
Even if we look at politically-motivated studies that are biased against share buybacks, the evidence doesn’t prove that the practice is bad for Americans. Forbes reported that “After the recent Republican tax bill, corporations have announced more than $480 billion in stock buybacks.” But, of the total incentives corporations received as part of tax reform, approximately 43% of their allocations directly benefited workers and consumers, while the other 57% went to shareholders – of which a large percentage are everyday Americans!
Our bottom line here is that we can’t believe everything we see. If we did, we’d be hyperventilating into a paper bag after watching this particularly egregious scare video. But rest easy: The SEC law on stock buy-backs is unlikely to change anytime soon. And even if it did, a stock crash would not be inevitable, as the market fared quite well before the rule (and the allowance of buybacks) was ever enacted in the first place.
Be careful what you watch, or, if you do come across fear-mongering pieces like I described above, talk to your advisor or dig into the “facts” touted in the message yourself. These days, it seems so easy to be negative; but to be positive and realistic about the future, that can take some work. Still, your portfolio (and your sanity) will be all the better if you stay on the rational side of things.