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Following another sell-off, S&P airlines have been regaining some altitude of late despite US Covid cases and hospitalizations rising. The surge in Omicron infections appears to be priced in. Airlines have underperformed S&P 500 by about 20% over the past 13 weeks. The market is expecting the virus story to be over soon and is slowly rotating into the beaten down industries. One of the reasons for the optimistic outlook is likely due to the fact that the Omicron variant is milder. At the same time, there are no lockdowns in the US, and Americans are learning how to live with Covid on a permanent basis. Case in point, holiday travel has exceeded the pre-pandemic peak. We are also getting closer to the point of the white-collar workers returning to the office – hope is that business travel will pick up shortly after – which will benefit airlines stocks. True, international travel still weighs on the industry as quite a few European and Asian countries have reinstituted the lockdowns, but those headwinds are likely to dissipate over the course of 2022. Bottom Line: The time is ripe to start nibbling at the S&P airlines index. ​​​​​​​

We have entered a new phase of the cycle, with central banks in most developed markets turning more hawkish (the Bank of England surprisingly hiking in December, and the Fed signaling three rate hikes for 2022). How much does this matter for equities and other risk assets? Our view is that, as long as economic growth continues to be strong (and we think it will), and provided that central banks don’t overdo the tightening (and, with inflation likely to come down this year, we think excess tightening is unlikely), the hawkish turn might temporarily raise volatility and cause the occasional correction, but it does not undermine the case for equities to outperform bonds over the next 12 months. We remain overweight global equities. Economic growth is likely to continue to be well above trend for the next year or two (Chart 1), driven by (1) consumers spending some of the $5 trillion of excess savings they have accumulated in the G10 economies, (2) the unprecedented wealth effect from recent stock and house price rises (Chart 2), and (3) strong capex as companies strive to increase capacity to meet the consumer demand (Chart 3). The upsurge in Covid cases in December (Chart 4) will undoubtedly slow growth temporarily. But the signs are that the now-prevalent Omicron variant is mild, and its rapid spread could help the developed world achieve “herd immunity” thanks to widespread vaccination and natural immunity, though emerging countries – especially China – may continue to struggle. Chart 1Growth Will Continue To Be Above Trend Chart 2Growth Will Be Boosted By The Wealth Effect... Chart 3...And Capex To Increase Production With US growth very strong – the Atlanta Fed Nowcast suggests Q4 QoQ annualized real GDP growth was 7.6% – and core PCE inflation 4.1%, it is hardly surprising that the Fed wants to accelerate the rate at which it withdraws accommodation. The FOMC dots, which see three rate hikes this year and another three in 2023, are unexceptional and close to what the futures market has already been (and still is) pricing in (Chart 5). Chart 4Covid Cases Not Leading to Hospitalizations And Deaths Chart 6Fed Hikes Have Usually Caused Only A Short-Lived Selloff Chart 5The Futures Market Is In Line With The FOMC Dots         In the past, the first Fed hike in a cycle has often triggered a mild short-term sell off in stocks (the timing depending on how well the hike was flagged in advance), but the equity market digested the news rapidly, quickly resuming its upward trend as the Fed continued to tighten (Chart 6). The same was true around the tapering and end of asset purchases in 2013-17 (Chart 7). All that depends, though, on whether the Fed is rushed into further rate hikes because inflation surprises even more to the upside. Our view remains that inflation will decline this year. The high inflation prints we are seeing now are mostly the result of exceptional demand for consumer manufactured goods, which the supply side has temporarily been unable to fulfil, causing shortages. This can be seen in the very different pattern of goods and services inflation (Chart 8). As we have argued previously, the supply response is now kicking in for key inputs into manufactured goods, such as semiconductors and shipping and, with demand likely to shift to services this year as the pandemic fades, this should bring inflation down. Chart 7Tapering Didn't Much Affect Stocks Either Chart 8Inflation Probably Will Decline This Year That said, the year-on-year inflation number will continue to look scary for some time, even if month-on-month inflation settles back to its pre-pandemic level of 0.2% (Chart 9). The consensus average forecast of 3.3% core PCE inflation in 2022 is factoring in monthly inflation around this level. The risks to inflation remain to the upside, particularly if wages respond to higher prices (US wage growth is currently 4-6%, significantly lagging behind price inflation – Chart 10), causing companies to raise prices further, triggering a price-wage spiral. Chart 9Year-On-Year Inflation Will Remain High Chart 10Risk Of A Price-Wage Spiral? All this suggests a year of significant volatility and uncertainty. The US stock market has not seen a correction (a drop of more than 10%) in this cycle, and there were no drawdowns last year of more than 5% (Chart 11). This is unusual: There were six 10%-plus corrections in the 2009-2019 bull market. The US equity rally is also looking increasingly narrow, with the run-up to a record-high in December driven by just a few large-cap growth stocks (Chart 12). This – and pricey valuations – makes it vulnerable and, as a hedge to downside risks, we continue to recommend an overweight in cash (rather than government bonds, which offer very asymmetrical returns, with significant downside in the event that inflation proves to be stubborn). Chart 11Where Have All The Corrections Gone? Chart 12Stock Market Has Got Very Narrow The other policy focus remains China. The authorities’ recent cut of the banks’ reserve ratio and more dovish talk does suggest that they are now concerned about how weak growth has become (Chart 13). A slight loosening of monetary policy has probably caused credit growth to bottom (Chart 14). However, our China strategists argue that the easing is likely to be only moderate since policymakers want to continue with structural reforms, such as reducing debt. The next few months may resemble early 2019 when the PBOC engineered a brief injection of liquidity which lasted only a few months. Moreover, the slump in the property market has not run its course (Chart 15), and this will hamper the authorities’ ability to accelerate infrastructure spending, much of which is financed by local governments’ property sales. Even if Chinese credit growth and the property market do pick up a little, the economy – and indeed commodity prices – will not bottom for another 6-9 months (Chart 16). But, when this happens, it would be a signal to turn more risk-on and bullish on cyclical countries and sectors, such as Emerging Markets, Europe, and Value stocks. Chart 13Chinese Data Looks Very Poor Chart 14Is Credit Growth Now Bottoming? Chart 15Slump In China Property Is Not Over Chart 16It Will Take A While For Commodity Prices To Pick Up Equities: While we remain overweight equities, returns this year will be only modest. Returns in 2020 were driven by multiple expansion, and last year by strong margin expansion (Chart 17), as often happens in Years 1 and 2 of a bull market. But this year, while sales growth should remain strong, BCA Research’s US equity strategists’ model points to a small decline in margins, which are at a record high (Chart 18). The PE multiple is likely to fall further too, as it usually does when the Fed is hiking. Even with buybacks and dividends, this amounts to a total return from US equities of only about 8%. Chart 17What Can Drive Returns In 2022? Chart 18Margins Likely To Slip From Record High Chart 19Europe Is More Sensitive To China Slowing... Nonetheless, we continue to prefer the US to other developed markets. Europe is more sensitive to the slowdown in China (Chart 19) and tends to underperform when global growth is slowing and is concentrated in services. Neither is it notably cheap versus the US relative to history (Chart 20). Emerging Markets face multiple headwinds, from the slowdown in China, to rampant inflation that is forcing central banks to hike aggressively (Brazil, for example has raised rates to 9.25% from 2% since April even in the face of weak growth and continuing risks from Covid). Chart 20...And Not Particularly Cheap Chart 22US Treasurys Are Attractive to Europeans And Japanese Chart 21Long Rates Low Given Fed Signaling Fixed Income: Long-term rates are surprisingly low, given the hawkish pivot of the Fed and other central banks (Chart 21). One explanation Fed chair Powell has given is the attractiveness of US Treasurys, after FX hedges, to European and Japanese investors (Chart 22). He is correct about this, but the advantage will wane as the Fed raises rates (while the ECB and BOJ don’t). We continue to forecast the 10-year Treasury yield to rise to 2-2.25% by the time of the first Fed hike. We are underweight duration and expect a moderate steepening of the yield curve. TIPs look richly valued, especially at the short end. We are neutral on US TIPs, where 10-years at least represent a hedge against tail-risk inflation. Inflation-linked bonds in the euro zone are particularly unattractive now (Chart 23).     Chart 23Breakevens Already Pricing In A Lot Of Inflation In credit, we continue to see value in riskier high-yield bonds, where US B- and Caa-rated names are trading at breakeven spreads close to historic averages (Chart 24). Our global fixed-income strategists have also recently turned more positive on US dollar-denominated EM debt, which offers a decent spread pickup versus US corporate debt of the same credit rating and maturity (Chart 25). Currencies: Relative monetary policy between the US and Europe and Japan could mean some further upside for the dollar over the next few months (Chart 26). However, the dollar is expensive relative to fair value, long-dollar is an increasingly crowded trade and, in the second half of the year, a rebound in China would boost growth in Europe and Emerging Markets, which would be positive for commodity currencies. Bearing that in mind, we remain neutral on the USD. Chart 25...As Are Some EM Dollar Bonds Chart 26Dollar To Rise On More Hawkish Fed? Chart 28Gold Is Vulnerable To Rising Real Rates Commodities: Metals prices are likely to suffer further in the first half of the year, as China’s growth continues to slow. This would suggest a further decline in the equity Materials sector. Nonetheless, we continue to have a neutral on commodities as an asset class because of the positive long-term story: Demand for metals for use in alternative energy is not being met by increased supply because investor pressure is stymying capex in the mining sector (Chart 27). It makes sense to have long-term exposure to metals such as copper and lithium which are used in electric vehicles. The oil price is mostly determined currently by Saudi supply. Our energy strategists forecast Brent oil to average $78.50 in 2022 and $80 in 2023, roughly the same as the current spot price. We remain neutral on gold: The bullion is not particularly attractively valued currently and will suffer if, as we expect, real long-term rates rise (Chart 28). Garry Evans, Senior Vice President Global Asset Allocation garry@bcaresearch.com   Recommended Asset Allocation 

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Highlights Elected officials’ antipathy for buybacks is unfounded, … : For the companies that are the primary drivers of buyback activity, returning cash to shareholders is more likely to have a positive impact on employment and investment than retaining it.  … and the idea that they boost stock returns may be, as well, … : Over the last ten years, a cap-weighted bucket of large-cap stocks that most reduced their share counts underperformed the bucket that most increased their share counts by 2% annually.  … especially within the Tech sector, which has most enthusiastically executed them: Despite the success of Apple, which has seen its market cap soar since embarking on a deliberate strategy to shrink its shares outstanding, a strategy buying Tech’s biggest net reducers and selling its biggest net issuers would have generated sizable negative alpha over the last ten years. The problem is the relative profile of net buyers and net issuers: In general, companies that consistently buy back their own stock are mature companies that cannot earn an accretive return by redeploying the capital their incumbent business generates. Net issuers, on the other hand, are often young companies seeking fresh capital to realize their abundant growth opportunities. The next year is likely to see a pickup of share buybacks nonetheless, … : Our US Equity Strategy service’s Cash Yield Prediction Model points to increased buyback activity in 2022.  … as management teams are wedded to them and buying back stock is the best use of capital for the mature companies executing them: Better to return cash to shareholders than to enter new business lines beyond the company’s area of expertise or embark on dubious acquisitions, even in the face of a potential 1% surtax. Feature Dear Client, This Special Report is the final US Investment Strategy publication for 2021. We will return with our first 2022 publication on Monday, January 10th. We wish everyone safe travels and a happy and healthy holiday season. Doug Peta Chief US Investment Strategist In Capitol Hill’s current polarized state, stock buybacks are in select company with the tech giants and China as issues that unite solons on both sides of the aisle. They are also a hot-button issue for some investors, who see them as telltale signs of a market kept aloft by sleight of hand. Although we do not think they’re worth getting worked up over – they do not promote the misallocation of capital and they may not actually boost stock prices – they come up repeatedly in client discussions and are likely to remain a feature of the landscape even if they are eventually subjected to a modest federal surtax. We have therefore joined with the BCA Equity Analyzer team to pore over its bottom-up database for insights into the buyback phenomenon. After ranking nearly 600 stocks in our large-cap universe in order of their rolling 12-month percentage change in shares outstanding across the last ten years, we were surprised to discover that the companies that most reduced their share count underperformed the companies that most grew it. We were also surprised to find that Tech was by far the worst performer among the six sectors with negative net issuance. Ultimately, the performance story seemed to boil down to Growth stocks’ extended recent edge over Value stocks. We present the data, our interpretation of it, and some future investment implications in this Special Report. Buybacks’ Bad Rap From Capitol Hill to the White House, prominent Washington voices bemoan buybacks. In a February 2019 New York Times opinion piece,1 Senators Sanders (I-VT) and Schumer (D-NY) argued that equity buybacks divert resources from productive investment in the narrow interest of boosting share prices for the benefit of shareholders and corporate executives. To counter the increasing popularity of buybacks, they proposed legislation that would permit buybacks only after several preconditions for investing in workers and communities had been met. Echoing their concerns, the White House's framework for the Build Back Better bill included a 1% surcharge on stock buybacks, “which corporate executives too often use to enrich themselves rather than investing in workers and growing the economy.” Buybacks’ opponents may mean well, but they seem to be missing an essential point: by and large, the companies that buy back their own stock lack enough attractive investment opportunities to absorb the cash their operations generate. Companies with more opportunities than cash don’t buy back stock; they issue it (and/or borrow) to get the capital to pursue them. The simple generalization that large, mature companies buy back shares while small, growing companies issue new ones is borne out by rolling 12-month percentage changes in shares outstanding by large-cap and small-cap companies (Chart 1). Chart 1The Smallest Companies Sell Stock; The Largest Buy It Back On an equal-weighted basis, large-cap companies’ rolling share count was flat to modestly down for ten years before the pandemic drove net issuance. Adjusting for market cap, rolling net issuance has been uninterruptedly negative, shrinking by more than 2% per year, on average. The equally weighted small-cap population has been a net issuer to the tune of about 4% annually, with the biggest small-caps issuing even more, pushing the cap-weighted annual average to north of 6%. The bottom line is that large-cap companies in the aggregate have been modestly trimming their share counts, with the biggest companies retiring more than 2% of their shares each year, while small-cap companies are serial issuers, led by their largest (and presumably most bankable) constituents. We are investors serving investors, not policymakers, academics or editorial columnists charged with developing and evaluating public policy. Our mandate is bullish or bearish, not good or bad. We point out the flaws in the prevailing criticism of buybacks simply to make the point that buybacks are not an impediment to productive investment and that no one should therefore expect that productivity and income will rise if legislators or regulators restrict them. On the contrary, since we believe that buybacks represent an efficient allocation of capital, we would expect that successful attempts to limit them will hold back growth at the margin. The Buyback Calculus A company that buys back more of its shares than it issues reduces its share count. All else equal, a company with fewer shares outstanding will report greater earnings per share and a higher return on equity. Increased earnings per share (EPS) does not necessarily ensure a higher share price; if a company’s P/E multiple declines by more than EPS rises, its price will fall. Distributing retained earnings to shareholders reduces a company’s capital buffer against shocks and limits its ability to fund investment internally, but companies that embark on the most ambitious buyback campaigns likely face limited investment opportunities and have much more of a buffer than they could conceivably require. Revealed preferences suggest that management teams like buybacks. They have every interest in getting share prices higher to maximize the value of their own compensation, which typically contains an equity component that accounts for an increasing share of total compensation the more they rise in the company’s hierarchy. It is unclear, however, just how much their attachment to buybacks is founded on an expectation that buying back stock will boost its price. The opportunity to extend their tenure by pursuing a shareholder-friendly policy may well offer a stronger incentive. Do Buybacks Boost Share Prices? Returning cash to shareholders is widely perceived as good corporate governance. It increases the effective near-term yield on an equity investment and denies management the cash to pursue dubious expansion schemes or squander capital on lavish perquisites. It facilitates the reallocation of capital away from cash cows to more productive uses. Buybacks are squarely beneficial in theory, but are they good for investors in practice? (Please see the Box for a description of the methodology we followed to answer the empirical question.) Box: Performance Calculation Methodology After separating stocks into large- and small-cap categories based on Standard & Poor’s market cap parameters for inclusion in the S&P 500 and the SmallCap 600 indexes, we ranked the constituents in each category in reverse order of their rolling 12-month percentage change in shares outstanding at the end of each month from 2011 through 2021. We then placed the top three deciles (the biggest reducers of their share counts) into the High Buybacks bucket and the bottom three deciles (the biggest net issuers) into the Low Buybacks bucket. We used the buckets to backtest a zero-net-exposure strategy of buying the stocks in the High bucket with the proceeds from shorting the stocks in the Low bucket, calling it the High-Minus-Low (“HML”) strategy. We computed two sets of HML results for the large-cap and small-cap universes. The first populated the buckets without regard for sector representation (“sector-agnostic”) and the second populated the buckets in line with the sector composition of the S&P 500 and SmallCap 600 Indexes (“sector-neutral”). We also track equal-weighted and cap-weighted versions of each HML bucket to gain a sense of performance differences between constituents by size. The experience of the last ten years fails to support the widely held view that stock buybacks boost share prices. Following a zero-net-exposure strategy of owning the top three deciles of large-cap companies ranked by the rolling 12-month percentage reduction of shares outstanding and shorting the bottom three deciles generated a modest positive annual return above 1% (Chart 2). Small caps merely broke even, largely because their biggest share reducers sharply underperformed in the first year of the pandemic. On a cap-weighted basis, however, the large-cap strategy generated a negative annual return a little over 1% during the period, indicating that the largest companies pursuing buyback programs lagged their net issuer counterparts. For small caps, the cap-weighted strategy also lagged the equal-weighted strategy, albeit by a smaller margin. Chart 2Buybacks May Help A Company's Stock Price At The Margin ... On a sector-neutral basis, the large-cap HML strategy roundly disappointed. The equal-weighted version was never able to do much more than break even, slipping into the red when COVID arrived, while the cap-weighted version continuously lagged it, shedding about 1.5% annually (Chart 3). Though it was hit hard by the pandemic, the equal-weighted small-cap HML strategy managed to generate about 1% annually, and boasted a 3.5% annualized return for the eight years through 2019. Chart 3... But They Are Not An Exploitable Factor Drilling down to the sector level offers some additional insights. While changes in shares outstanding vary across large-cap sectors, with six sectors reducing their shares outstanding and five expanding them, every small-cap sector has been a net issuer in every single year, ex-Discretionaries and Industrials in 2019 (Chart 4). Relative sector capital needs are largely consistent regardless of market cap, however, with REITs, which distribute all their income to preserve their tax-free status, unable to expand without raising cash in the capital markets, and Utilities, Energy and traditional Telecom Services being capital-intensive industries (Table 1). Many Tech niches are capital-light, and established Industrials and Consumer businesses often throw off cash. Table 1Sector Appetite For Capital Is Consistent Across The S&P 500 And The SmallCap 600 There is less large- and small-cap commonality in HML relative sector performance than in relative sector issuance. Away from Real Estate, Tech and Discretionaries, small-cap HML sector strategies generated aggregate positive returns, led by Communication Services and Energy (Chart 5). For the large caps, most HML sector strategies produced negative alpha, though the four winners and the one modest loser (Financials) are among the six sectors that have net retired shares outstanding since 2012. Tech is the conspicuous exception, with its HML strategy yielding annualized losses exceeding 3%, contrasting with the sector’s enthusiastic buyback embrace. The Corporate Life Cycle Surprising as they may be on their face, negative cap-weighted ten-year HML returns do not mean that buybacks are counterproductive. We simply think they illustrate that net issuance activity follows from a company’s position in the corporate life cycle (Figure 1). Investors have prized growth in the aftermath of the global financial crisis, and the companies with the best growth prospects are often younger companies just beginning to tap their addressable markets. They have a long pathway of market share capture ahead of them and need to raise capital to begin traveling it. Many of these strong growers populate the Low basket, especially in the Tech sector. Companies that return cash to their owners via share repurchases are often more mature. Their operations are comfortably profitable and generate more than enough cash to sustain them. They have already captured all the market share they’re likely to gain in their primary business and may not have an outlet for its proceeds in a space in which they have a plausible competitive advantage. Lacking a clear path to bettering the returns from their main operations, they have been steadily accumulating cash for a long time. Through the lens of the Boston Consulting Group’s (BCG) growth share matrix,2 a successful business in the Maturity stage of the business life cycle is known as a Cash Cow. Cash Cows have gained considerable market share in their industry, affording them a competitive advantage based on scale, brand and experience, but little scope for growth because they have saturated a market that is itself mature (Figure 2). BCG advises management teams with a portfolio of business lines to milk Cash Cows for capital to reinvest in high-share, high-growth-potential Stars or low-share, high-growth-potential Question Marks that could be developed into Stars. In the public markets, a mature large-cap company that retains its excess capital impedes its owners’ ability to redeploy that capital to faster growing investments, subverting the overall economy’s ability to redirect capital to its best uses. Walmart, Twentieth-Century Growth Darling Walmart fits the business life cycle framework to a T and has evolved into a textbook Cash Cow. It is a dominant player that executed its initial strategy so well that it has maxed out its share in the declining/stagnating brick-and-mortar retail industry. Its international attempts to replicate its domestic success have uniformly failed to gain traction, and it currently operates in fewer major foreign countries than it's exited. Given Walmart’s star-crossed international experience and the dismal history of large corporate combinations, returning cash may be the optimal use of shareholder capital. Walmart began life as a public company in fiscal 1971 squarely in the Growth phase. It was profitable from the start and grew annual revenues by at least 25% for every one of its first 23 years of public ownership (Chart 6, top panel). It was a modest issuer of shares during its Growth phase, conducting just one secondary common stock offering 12 years after its IPO and otherwise limiting growth in shares outstanding to acquisitions, management incentive awards and conversions of debt and preferred stock. Chart 6From Young Turk To Respected Elder​​​​​​ Table 2From Growth To Maturity At Walmart Once its revenue growth slipped into the low double-digits in the late nineties, it began retiring its shares at a deliberate pace (Table 2). That retirement inaugurated a ramping up of Walmart’s annual payout ratio (Chart 6, bottom panel) and cash yield (dividend yield plus buyback yield), underlining its transition from Growth to Maturity. Walmart’s 2010 admission into the S&P 500 Pure Value Index marked its ripening into full maturity, and it has been a Pure Value fixture since 2013. Today’s stolid icon is a far cry from the ambitious disruptor on display in its 1980 Annual Report: Subsequent to year end, your Company’s directors authorized [a one-third] increase in the annual dividend[.] This continues your Company’s approach of distributing a portion of profits to our shareholders and utilizing the balance to fund our aggressive expansion program. [T]he decade of the ’70’s … has been a tremendous growth period for your Company. In January 1970, we … had 32 stores …, comprising less than a million square feet of retail space. In the next ten years, we added 258 … stores, … constructed and opened three new distribution facilities, and increased our retail space to 12.6 million square feet. During that same period of time, we increased our sales and earnings at an annual compounded rate well in excess of 40 percent. Reflecting upon the progress we have made in the ‘70’s makes it apparent that there is even more opportunity in the ‘80’s for your Company, and we are better positioned to maximize our opportunities … than ever before. The Exception That Proves The Rule Apple has shined so far in the twenty-first century much like Walmart did in the latter stages of the twentieth, growing its revenues and net income at compound annual rates exceeding 20% and 25%, respectively. Unlike Walmart, however, Apple hasn’t required a steady stream of capital to grow. While Walmart had to plow its earnings right back into the business to fund the acquisition and buildout of property to create stores, warehouses and distribution centers, Apple has simply had to make incremental improvements to its music players, phones and tablets while shoring up the moats around its virtual app and music marketplaces. As a result, cash and retained earnings began silting up on Apple’s balance sheet, lying fallow in short-term marketable securities and crimping a range of return metrics. Table 3Apple's Long Road To "Net Cash Neutral" Beginning in its 2013 fiscal year, Apple embarked on a lengthy strategy of returning that cash to shareholders, buying back stock at a rate that has allowed it to reduce its shares outstanding by 37.5% in the space of nine years (Table 3). It has reduced its retained earnings by more than $90 billion over that span and is on course to wipe them out completely in the fiscal year ending next September. Equity issuance in the form of incentive compensation augments Apple’s capital by about $5 billion per year, but if it continues to distribute more than 100% of its annual earnings in the form of dividends and repurchases, it could wipe out the rest of its recorded equity capital as well. Does this mean Apple is in danger of sliding into insolvency? Not in the least. The value of its assets dramatically exceeds the value of its liabilities, as evidenced by its nearly $3 trillion market cap and the top AAA credit rating Moody’s awarded it this week. Its reported book value is artificially suppressed by generally accepted accounting principles’ inability to value organically developed intellectual property (IP). Apple’s book value and that of other companies that generate similar IP, or benefit from internally generated moats, are dramatically undervalued. Takeaways For now, Apple is an anomaly when it comes to aggressively returning cash to shareholders while it is still in the Growth stage of its life cycle. Returning cash is typically the province of mature companies with steady operations that are unlikely to grow. It is generally good for the economy when those companies return excess cash to shareholders, freeing it up for more productive uses. If lawmakers or regulators manage to restrict the flow of capital from cash-cow companies to potential stars, we should expect activity to slow at the margin, not quicken. The experience of the last ten years suggests that companies that shrink their share counts do not outperform their counterparts that expand them. The trading strategy of shorting the biggest net share issuers to purchase the biggest net share reducers has produced negative returns. It is unclear if shareholders of companies who cannot redeploy their internally generated capital to augment the returns from their primary operations would be better served if their manager-agents retained the capital, though we suspect they would not. It seems inevitable that manager-agents with access to too much capital will eventually get into mischief. Table 4It Makes Sense That Insurers Would Buy Their Own Cheap Stock ... Chart 7... But No One Else Seems To Want To If buying back stock represents good corporate stewardship at mature companies, their shareholders should someday be rewarded for it. Given that the companies most suited to buying back stock tend to fit in the Value style box, the zero-net-exposure HML strategy may continue to accrue losses. Apple remains an outlier among Growth companies as an avid buyer of its stock; much more common are the S&P 500 Life and Multi-Line Insurer sub-industry groups, without which the S&P 500 Pure Value Index would have a hard time reaching a quorum (Table 4). Their constituents have assiduously bought back their stock over the last ten years, albeit to no relative avail (Chart 7). However, they should be better positioned once Value returns to favor and rising interest rates make investing their cash flow a more attractive proposition.   Doug Peta, CFA Chief US Investment Strategist dougp@bcaresearch.com Footnotes 1      Opinion | Schumer and Sanders: Limit Corporate Stock Buybacks - The New York Times (nytimes.com) Accessed December 17, 2021. 2     https://www.bcg.com/about/overview/our-history/growth-share-matrix Accessed December 19, 2021.