Thursday's Scoop: Drift☀️

Hey friend - it’s almost Friday. I just did a TV interview down on Wall Street. More exciting things ahead…

Here’s what you need to know today…

1. Layoffs haven’t become a widespread problem yet.

2. Stock buybacks are surging.

3. Attacks on ships in the Red Sea are still disrupting trade.

S&P 500: 4,997.91
1Mo: +5% | 1Yr: +22% | 5Yr: +80%

The market inched to another new high today as investors digested a slew of corporate financial reports. Luxury brands seemed to have a good holiday season, pointing to a rebound for upper-income consumers.

The stream of layoff announcements doesn’t seem to be a problem yet. The Labor Department reported initial unemployment claims fell last week to a relatively low level of 218,000, despite daily headlines about layoffs. Most announcements have come from major corporations, particularly tech and media, which may offer sufficient severance pay, delaying unemployment applications. It could also be a sign that people are finding new jobs quickly. Small businesses are still struggling to fill positions.

America’s biggest businesses have ramped up spending to inflate their stock price. US companies have announced more than $100B in share repurchase plans in the first week of February alone, aiming to buy back shares from the open market to make each outstanding share more valuable. It’s an investment in their own stock and a sign of confidence in future gains, especially given that the market is at an all-time high. S&P projects S&P 500 companies will repurchase $885 billion in stock this year, 10% more than last year but slightly behind 2022’s record year. Much of this spending that exclusively benefits shareholders comes from companies announcing layoffs and cost cuts.

Attacks from Houthi militants on ships traveling through the Red Sea continue to disrupt trade. Shipping giant Maersk, which handles 15% of global containers at sea, has stopped traveling through the Red Sea. More than 12% of international shipping used to flow through the Red Sea and Suez Canal. The disruption of the major trade route has more than doubled shipping costs, forcing transit to reroute around Africa. Maersk doesn’t think the attacks have peaked.

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What are buybacks?

Companies with extra cash can reward shareholders for their support in two ways. First, they can distribute money directly out to investors, literally giving them a share of the profits by paying them a dividend. Companies will declare that every investor gets $X for each share they own.

Second, companies can buy back their own shares from public investors. Buybacks allow companies to reduce the number of outstanding shares in the market, making each remaining share more valuable. They're slicing their company ownership into fewer pieces, allowing each shareholder to own a greater percentage of the company. Buybacks are seen as a vote of confidence - management investing in their own shares means they believe they’ll get more valuable. They were actually considered illegal market manipulation until the 1980s when the Reagan administration helped change the laws to deregulate the financial industry. Now, they account for a substantial portion of the stock market's growth.

If companies pause or slow either of these activities, it can mean they're preparing for trouble.