A Bruising Tussle and Buyback Blowback

Aoifinn Devitt – Chief Investment Officer

It was a bruising week last week as the S&P recorded its third negative week in a row and its largest weekly decline in over 10 weeks. The tripwire in this case was the cautious sales outlooks from two major retailers – Walmart and Home Depot, which sent both bonds and stocks tumbling.  

As the chart below shows, the month of February was a down month for the S&P as well as the Nasdaq, although both remain up for the year. 

Source: Morningstar as of 2/28/2023

Meanwhile, the hard data continues to be mixed.  The Personal Consumption Expenditures Price Index, which is the US Fed’s preferred gauge for measuring inflation rose more than expected – 0.6% from December to January, a month-to-month increase not seen since June of last year.  

Housing indicators showed existing home sales continuing to trend lower, although by less than in the previous 12 months.  There was also evidence that newly built apartments coming online has led to a drop in rents.1  The current delivery of new supply is estimated to be the largest increase since 1986.  This either indicates a consumer that is maxed out in terms of spending or a massive supply/demand mismatch.  Both of these are weakly positive indicators of a consumer that may be running out of steam, and may ultimately be positive for inflation numbers as “shelter” was taking up an increasing share.  

For now, though, the message – loud and clear – seems to be that markets may have got ahead of themselves in trying to put a lid on inflation worries.  We are not, by any means, out of these woods. 

This pattern was repeated in Europe, where both Spain and France showed inflation rebounding, suggesting that the European Central Bank would have to press ahead with its tightening agenda.  

The indications that central banks and monetary policy tightening have further to go had a profound effect on bonds over the past week with rising yields across the board.  Currently, bonds have essentially “round tripped” or have given up almost all of their gains since the beginning of the year. All eyes will be on February’s employment data, due to be released over coming days for an indication of the future direction of interest rate policy. 

Meanwhile, another tussle was brewing relating to stock buybacks.  While stock buybacks have year to date reached a record of over $200 bn and they are expected to top $1 trillion this year, the practice had come under assault by the President during the State of the Union speech. It seems, to date though, that few companies have been deterred by the new 1% federal tax on buybacks that took effect at the beginning of the year.  Warren Buffett in the past week waded into the fray defending the practice. Buybacks – or companies repurchasing their own shares to return money to shareholders – are generally seen as a positive action by the company and have bolstered stock market strength, even in the wake of other stock market counterforces.  It will be interesting to see what will happen to sentiment if this prop is removed.  


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