Leading stock markets may finally be connecting with the real economy after a long period of in-depth euphoria. Even before United States President Donald Trump signalled that trade wars may persist (only to be refuted by rumours of an imminent deal), there were signs that stock dumping might be imminent.
After a veritable frenzy of buying back their stocks, some big companies in the US and elsewhere are using their overvalued shares or “scrip” as a currency to buy other companies that have real assets and earnings while the going is still (just about) good. This is an ominous sign.
Buying back shares made sense for firms with interest rates at record lows. It makes debt capital cheap and results in higher earnings for remaining shareholders. But a recent wave high-profile mergers and acquisitions (M&As) – including LVMH buying Tiffany and the Manchester City football club deal – with some financed by share exchanges, has been seen by some analysts as signalling the end of the bull market.