This is an acceleration of a trend started 10 years ago with blue chip IBM Corp, for example, spending $125bn on buybacks since 2005 and $32bn on dividends compared to its $111bn in capital spending and R&D during the same period.
Pharmaceutical giant Pfizer, on the other hand, forked out $139bn on buybacks and dividends in the past decade, compared to $82bn on R&D and $18bn in capital spending.
Meanwhile, other sectors are just trying to keep their heads above water. Energy companies have been battered by falling commodity prices while exporters are struggling with the strengthening greenback.
Oil plunged to near $40 a barrel in November while a stronger relative economy combined with the never ending threat of a rate rise pushed the US Dollar Index, which measures the dollar versus the euro, Japanese yen, British pound, Canadian dollar, Swedish krona and Swiss franc, to a high of 99, culminating in a roughly 10% gain so far in 2015.
Ironically, the retail sector which should have benefitted from cheaper imports and lower energy prices did not enjoy the surge that was predicted. Figures from the Commerce Department show that sales rose a scant 0.1% in October instead of the 0.3% that was forecast. This followed a flat period in the prior two months and was down from the 1.7% reported in October last year.
Consumer spending is a key economic indicator because it accounts for around 70% of economic activity in the US with retail sales comprising a large chunk. The real test of consumer confidence however, will be in the all-important run-up to Christmas.
The other uncertainty hanging over the market is the timing of the interest rate hike. Since March the Federal Reserve has been threatening to change the direction of its monetary policy. The unexpectedly strong October jobs report which showed unemployment at 5% fuelled speculation that December would be the month. However, no final decision has yet been made and the conjecture continues.
One fear is a repeat of 1994 when the Federal Reserve surprised the market with a series of hikes to slow inflation growth, according to Andrew Pease, global head of investment strategy for Russell Investments. Bond prices collapsed and equities plummeted as the benchmark rate jumped three percentage points to 6% from February 1994 to February 1995.
“It will be a seminal moment but this time around the Fed will move in a much slower and smoother way,” he adds.
Few though are willing to predict the exact date as the signals have been so mixed. “In our view, it is possible that the Fed is going to hike rates at the December FOMC meeting,” says John Arege, managing director, US Value Equity, Goldman Sachs Asset Management.
“However, given that wage growth and price inflation are yet to meet the Fed’s targets, there remains a possibility that this decision could be delayed until 2016.”
Matthew Benkendorf, director and the lead portfolio manager of the US equity strategy at Vontobel Asset Management, adds: “The Fed move is a big issue even though it will only raise interest rates by 0.25%. The market doesn’t like change especially after an unprecedented period of low interest rates.
Although it is expected, people will breathe easier when we get to the other side.”
Benkendorf, unlike some fund managers, is relatively positive. “I am not wearing rose coloured glasses, but the US is on a good footing in terms of decent earnings growth. The banking system, which is the backbone of the economy, is well capitalised especially when compared to Europe and there are a pool of quality companies such as Google, Apple, Starbucks, Visa and Paypal with large recognisable brands that are attractively valued.”
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