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What's going on?

US companies are all me, me, me these days: data out on Monday showed they’ve spent record amounts buying back their own shares this year.

What does this mean?

Cast your mind back to early last year: sourdough starters were our new best friends, a walk round the block was a big night out, and companies were holding their breath and tightening their belts. This year, though, they’ve been all about splashing out: US firms spent a record $870 billion in the first nine months of this year buying back their own shares. That’s 6% more than 2018’s previous record, and three times more than over the same period last year (tweet this).

Why should I care?

For markets: Don’t be fooled.
Buybacks are a good thing for investors, reducing the number of shares on the market and pushing their price up. But they’re also a bit of a red flag. See, companies often use their spare funds to grow their businesses or buy out competitors. So the fact that so many have opted for buybacks – especially at a time when shares are so expensive – suggests they can’t find any investments that’ll benefit their long-term growth. That could lead to lower profits further down the line.

For you personally: Buy the dip?
Investors sent US stocks down 5% from their September highs last week – the most in almost a year – as they started to worry that the post-pandemic recovery had passed its peak. But JPMorgan and Goldman Sachs are more optimistic: both investment banks just argued that inflation – which they think is the biggest obstacle to the recovery – is only temporary, and that now could be the perfect time to buy in while the going’s cheaper.

Originally posted as part of the Finimize daily email.

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