In a famous Indian parable [here] a group of blind men encounter an elephant. Since each blind man encounters a different part of the elephant (e.g., the tusk, the leg), there is a great deal of disagreement as to what the elephant is. The moral of the story is that “humans have a tendency to project their partial experiences as the whole truth.”[1]

Projecting partial experiences as the whole truth has become standard practice in the arena of investing. Explanations for continued strength in stock prices range from strong economic growth to contained inflation to lower taxes to technology. It all depends on the partial experiences of the observer. There is, however, a different and yet dominant influence on stock prices that rarely gets the attention it deserves. That proverbial “elephant in the room” is share repurchases.

Of course no-one is claiming that economic factors are not critical determinants of share values — there is no disputing that. Actual prices, however, are determined by markets and as such, represent a form of competition between buyers and sellers. When buyers compete more aggressively, prices go up, and when sellers dominate the prices go down. In short, stock prices, like so many economic goods, are determined by supply and demand.

Based on this relationship and on recent positive price action, it is easy to infer that the bulls are winning. Further, it is tempting to associate this positive result with strong economic growth (at least in the US), low unemployment, low inflation, and lower corporate taxes. All of this feeds an alluring narrative: Finally, things are getting back to normal.

But the bears are not unworthy competitors. As John Authers reports in the Financial Times [here], trends in the...

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