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Are stock buybacks driving the stock market?

(MoneyWatch) A recent USA Today article says that the recent rise in stocks can be explained by one simple factor -- companies repurchasing their own stock. "Last year, companies in the Standard & Poor's 500-stock index spent $404.2 billion to buy their own company's stock, nearly double the amount back in 2009... .," the piece notes as its critical piece of evidence positing a direct link between stock buybacks and the buoyant market performance of late.

The implication: Companies are creating demand for their own shares, pushing up stock prices. That sounds plausible, but it's not not supported by the facts. Look at the following chart of S&P 500 buybacks since 1999, with buybacks shown as a percent of outstanding shares.

Data from Standard and Poors

As the data makes clear:

-- Stock buybacks peaked just before the stock market crashed in 2008

-- Buybacks plunged in 2009, as stock prices were surging

-- Buybacks jumped again in 2011, when the S&P 500 turned in only a small gain

In fact, if one were searching for patterns here, the high level of stock buybacks would have predicted a market decline or plunge.

Lesson: Don't be a junkie

There is a greater takeaway here than my usual warning about not believing everything you read in the media. The real lesson is that we have an addiction to prediction. Fingering the tea leaves, we feel compelled to explain past market activity and pretend to know the future. Although satisfying this urge can be endlessly entertaining, it also can cost us dearly.

A corollary that lesson -- people who know they don't know will profit from those that think they do. Why is the market up? I have no idea!

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