Two things. Corporate buybacks and indexed funds.
According to Ed Yardeni, these twin factors are driving today’s bull market from a flow-of-funds perspective:
The bottom line is that the current bull market has been driven largely by corporations buying back their shares [Chart 1], as I have been observing for many years. More recently, we have been seeing individual investors increasingly moving out of equity mutual funds and into equity ETFs [Chart 2]….
We may be witnessing the beginning of an ETF-led melt-up, which may simply reflect individual investors pouring money into passive stock index funds. Lots of them seem to be more interested in seeking out low-cost funds rather than cheap stocks. In this case, valuation multiples would lead the melt-up, until something happens to scare investors out of those passive funds, which could trigger either a correction or a nasty meltdown.
Thinking out loud, and looking around the corner, the price behavior of MSCI, Inc. may provide a contrarian clue. If indexing and leverage are both driving the current bull market, MSCI is likely to go parabolic – i.e., up and out of its orderly channel – ahead of the next important top (Chart 3).
Why MSCI? It’s revenues are nearly a pure play on indexing, and management is aggressively borrowing to retire shares. Revenues have grown about 6% annually since 2012 while debt/equity has vaulted from 50% to 650%. Wow! Indexing plus leverage. MSCI has it all.
Let’s keep an eye on MSCI in months ahead. No guaranty it’s the perfect canary, but an interesting candidate for sure.
Chart 1. Corporate buybacks
Chart 2. ETF inflows
Chart 3. MSCI trend channel