"2022: The Buyback Bonanza"

MONETARY

• The Federal Reserve, pursuant to its February 1^st meeting, raised the target fed funds rate by 25bps from a level of 425-450bps to a level of 450-475bps. This FOMC meeting largely marked the first significant rhetoric change by Chairman Jerome Powell, confirming the existence of material disinflationary pressures³
  • On the topic of inflationary pressures, Chairman Powell referenced a significant shift in the prices of goods as a strongly encouraging sing of easing pricing pressures³
    • (Powell) “We can now say, I think, for the first time that the disinflationary process has started. We can see that. And we see it really in goods prices so far. Goods prices is a big sector. We — This is what we thought would happen since the very beginning and now here it is actually happening.”³
  • Regarding the Fed’s outlook for housing services, which are still experiencing inflationary pressures³
    • (Powell) “As I mentioned with housing services, we expect and other forecasters expect that measured inflation will continue moving up for several months but will then come down assuming that new leases continue to be soft. And we do assume that.”³
  • Chairman Powell pointed to the Fed’s political independence from Congress as it relates to the situation of raising the Debt Ceiling limit for the Government³
    • (Powell) “This is a matter that’s to be resolved between, really. It’s really Congress’s job to raise the debt ceiling, and I gather there are discussions happening, but they don’t involve us. We’re not involved in those discussions. So, we’re the fiscal agent.”³
  • On the topic of an economic downturn being a necessity for a return to historically normal level of inflation, Chairman Powell reiterated his stance that a soft-landing continues to be possible³
    • (Powell) “I continue to think that there’s a path to getting inflation back down to 2 percent without a really significant economic decline or a significant increase in unemployment”³
    • (Powell) “there’s ongoing disinflation and we don’t yet see weakening in the labor market. So, we’ll have to see.”³
  • Regarding the Labor Market, Powell continued to reiterate the abnormally strong state of Labor Market Demand³
    • (Powell) “Despite the slowdown in growth, the labor market remains extremely tight, with the unemployment rate at a 50-year low, job vacancies still very high, and wage growth elevated. Job gains have been robust, with employment rising by an average of 247,000 jobs per month over the last three months. Although the pace of job gains has slowed over the course of the past year and nominal wage growth has shown some signs of easing, the labor market continues to be out of balance.”³

 

FISCAL

• Republican leadership in the House actively considering reaching a short-term extension of the debt ceiling until September 30, allowing for more time for negotiation²
  • The short-term extension is reported to being discussed amongst Republican legislators, but has not been confirmed as a definite strategy as of yet²
  • At present time it is unclear whether or not Democrat Senators or the White House would agree to a short-term extension of the debt ceiling²
  • President Biden has insisted that he will not consider negotiation of the debt-ceiling limit as a means for Republican leadership to extract spending concessions²
    • (Biden) “I will not let anyone use the full faith and credit of the United States as a bargaining chip”²

 

GEOPOLITICS

• Ahead of an expected Russian military offensive in Ukraine, The U.S. sends M1A1 Abrams tanks to Ukraine in support of the country’s defense efforts¹
  • Move comes as Germany also sends military aid to Ukraine in the form of 14 14 Leopard 2 A6 tanks, as a ‘first-step’ in the country’s military aid to Ukraine¹
  • Russian ambassador to the U.S. Anatoly Antonov condemned the recent decision to send military equipment to Ukraine¹
    • (Antonov) “If a decision to transfer to Kyiv M1 Abrams is made, American tanks without any doubt will be destroyed as all other samples of NATO military equipment”¹

 

MISCELLANEOUS

• Capitalizing on lower asset prices, companies more than tripled the amount of buybacks done over the past year to an all-time high level of $135B⁴
  • Corporations largely took advantage of lower asset prices by increasing the level of buybacks undertaken, a primary means by which corporations return capital to shareholders⁴
  • Operationally speaking, share buybacks reduce the total amount of shares outstanding for a company, theoretically making each remaining share more valuable⁴
  • Given the current tax-free nature of corporations buying back their own shares, corporate buybacks have been cited as a potential source for future increased tax revenue to be derived from⁴

 

[See Below for Disclosures & Annotations]

DISCLOSURES

Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.

The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful.

The companies presented here are for illustrative purposes only and are not to be viewed as an investment recommendation.

Tax laws and regulations are complex and subject to change, which can materially impact investment results. LPL Financial does not provide tax advice. Clients should consult with their personal tax advisors regarding the tax consequences of investing.

 

ANNOTATIONS

1. CNBC. “U.S. will send Abrams tanks to Ukraine ahead of expected Russian offensive”. January 24, 2023.
2. Federal Reserve. “Transcript of Chair Powell’s Press Conference”. February 1, 2023.
3. Bloomberg. “Biden Accuses Republicans of Exploiting Debt-Ceiling Limit”. January 26, 2023
4. Bloomberg. “Stock Buybacks Race to Record $132 Billion Start as Companies Snub All Warnings”. February 2, 2023