Dr. Ed Yardeni: Buybacks, Great Rotation, and Melt-Up

Until last year, retail investors didn’t believe that the bull market in stocks was sustainable. Instead, they chose to buy bonds. From 2009-2012, bond mutual funds attracted $1,372 billion in net inflows. Over that same period, equity mutual funds had net outflows of $75 billion.

During the first 11 months of 2013, bond funds had net inflows of only $16 billion (with $111 billion in outflows from June through November), while equity funds had net inflows of $193 billion. This may be the start of the so-called “Great Rotation” from bonds to stocks by retail investors. By the way, over the past 12 months through November, the combined net inflows into equity mutual funds and ETFs totaled a record $388 billion.

The WSJ ran an article at the end of last year (12/25) titled, “Companies Binge on Share Buybacks.” For the past couple of years, this has been a story I’ve often told to explain what’s driving the bull market. Recently released data show that S&P 500 companies repurchased $128 billion of their shares during Q3. They paid out $79 billion in dividends during that quarter and a record $85 billion during Q4. The $207 billion sum of buybacks and dividends for Q3 is just shy of the $233 billion record high during Q3-2007.

Since the start of the bull market during Q1-2009 through Q3-2013, share buybacks totaled $1.6 trillion and dividends totaled $1.2 trillion, summing to a whopping $2.8 trillion! Corporate cash flow rose to a new record high of $2.3 trillion (saar) during Q3. Yet nonfinancial corporate net bond issuance totaled a record $665 billion over the past four quarters through Q3, with issuers using some of the proceeds to buy back their shares.

Buybacks are likely to remain strong in 2014. Now imagine the melt-up potential of the stock market if the Great Rotation by retail investors from bonds into stocks continues to build momentum. And by the way, January has a history of being a good month for inflows into equity mutual funds.

Today's Morning Briefing: Anatomy of a Melt-Up. (1) Updating three scenarios. (2) And the 2013 winner is: Rational Exuberance. (3) Will Irrational Exuberance get the 2014 award? (4) A year to pack our bags in May? (5) Stampeding bulls. (6) The Great Rotation is picking up steam. (7) Buybacks approaching record highs. (8) Forward P/Es could head into the high teens. (9) Fed may have to speed up tapering. (10) No soft patch in latest US economic data. (11) “American Hustle” (+ +). (More for subscribers.)