Bloomberg News: The No. 1 Source of Stock Demand Is a Goner, for Years to Come

April 06, 2020

Article by Gregor Stuart Hunter in Bloomberg News

Companies, the biggest source of demand for stocks in recent years, are likely to sharply cut back their purchases for years to come, preventing equities from reaching pre-coronavirus crisis valuations, according to Sanford C. Bernstein.

“For at least several years buybacks will be severely curtailed,” analysts including Inigo Fraser-Jenkins, who once did financial-stability research at the Bank of England, wrote in an April 6 note.

The dynamic is especially meaningful for the U.S., the Bernstein team wrote. Over the past five years, buybacks added about 1 to 1.5 percentage points to earnings-per-share growth, bolstering American stocks, the analysts estimated.

It’s possible that debt burdens could even go beyond the levels seen in World War II, depending on future additional rounds of fiscal stimulus, according to Bernstein. Along with the risk of faster inflation over time -- in part thanks to de-globalization -- that makes government bonds less attractive as a hedge to stocks, the analysts wrote.

“The absence of risk-free instruments that can deliver positive real return and at least a risk of higher inflation further bolster the case for gold,” on which the analysts have been positive for more than a year.

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