With the last half of March upon us, the blackout of stock buybacks threatens to reduce one of the liquidity sources supporting the bullish run this year. Unofficially, a company’s buyback blackout period generally lasts from the last two weeks of the quarter until after 48 hours it announces the quarter’s earnings results.
The chart below via Pavilion Global Markets shows the impact stock buybacks have had on the market over the last decade. The decomposition of returns for the S&P 500 breaks down as follows:
- 1% from multiple expansions (21% at Peak),
- 3% from earnings (31.4% at Peak),
- 1% from dividends (7.1% at Peak), and
- 27% from share buybacks(40.5% at Peak)
Yes, buybacks are that important.
For much of the last decade, companies buying their own shares have accounted for all net purchases. The total amount of stock bought back by companies since the 2008 crisis even exceeds the Federal Reserve’s spending on buying bonds over the same period as part of quantitative easing. Both pushed up asset prices.
In other words, between the Federal Reserve injecting massive liquidity into the financial markets and corporations buying back their shares, there have been no other real buyers in the market.
Given the increasing amount of corporate share buybacks, with 2024 expected to set a record, the importance of that activity has been a critical support for asset prices.
Notably, since 2009, and accelerating starting in 2012, the percentage change in buybacks has far outstripped the increase in asset prices.
Notably, since 2009, and accelerating starting in 2012, the percentage change in buybacks has far outstripped the increase in asset prices.
Unsurprisingly, the market rally that began in November correlated with a strong surge in corporate share repurchases. Interestingly, while the media touts the strong earnings growth shown in the recent reporting period, such would not have been the case without the surge in buybacks.
The result is not surprising given that the majority of earnings growth for the quarter came from the companies that are the most aggressive with share repurchases. However, given current valuation levels, it should make one question precisely what you are paying for.
Nonetheless, the buyback surge has supported the market surge since the October 2023 lows. We saw the same at the bottom of the market in October 2022. The chart shows the 4-week percentage change in share buybacks versus the S&P 500.
The end of October tends to be the inflection point for the market, particularly over the last few years, because that is when the blackout period for share buybacks fully ends. While many argue that buybacks have little to do with market movements, a high correlation exists between the 4-week percentage change in buybacks versus the stock market. More importantly, since the act of share repurchases provides a buyer for those shares, the .85 correlation between the two suggests this is more than just a casual relationship.
The Fed
First, as expected, the Fed kept its target federal-funds range between 5.25% and 5.5%, where it has been since last June… Second, they signaled multiple rate cuts to come later this year… And third, the bank said it would keep trimming its balance sheet, but less quickly than it has been for the past two years.
In his post-meeting press conference, Powell, for the first time, indicated the central bank would “slow down” the pace of balance-sheet reduction “fairly soon,” he said. “We want to avoid any kind of turbulence,” he continued, referring to potential troubles with the banking system after the central bank chopped $1.5 trillion from its balance sheet since the spring of 2022.
In its quarterly projections, notably, the Fed members also maintained an outlook for three 25-basis-point cuts to its suggested fed-funds rate later this year… inflation to be 2.4%… plus GDP around 2% for this year (higher than the 1.4% it projected in December)… and an unemployment rate at 4%, slightly lower than it thought three months ago.
The Fed is keeping on with the idea that the pace of inflation is coming down enough, the labor market isn’t cratering, and economic growth will continue to pick up – even before rate cuts that the central bank is also promising.
Add in the idea of balance-sheet reduction slowing down (but the Fed still having the ability to put liquidity into areas that might need it), which could be looked at as a kind of stimulus without moving rates. All in all, Mr. Market got what it wanted.
US Economy
- The federal government’s interest expenses continue to climb.
- Residential RE asking prices are at record levels for this time of the year.
- Housing starts rebounded from the weather-related weakness in January, boosted by single-family construction.
- Single-family building permits were well above last year’s levels.
- Multifamily (apartments) activity remains soft, as a surge of new inventory hits the market, and rent growth slows.
- The March PMI report by S&P Global indicates a further strengthening of US manufacturing activity
- The Philly Fed’s regional manufacturing index held in growth mode this month, with new orders now growing.
- The Conference Board’s leading index ended its streak of declines.
- Here are the drivers of last month’s changes in the leading index.
Source: Wells Fargo Securities
Market Data
- Bitcoin fund flows have diverged from gold.
- Commodities are starting to improve relative to the S&P 500.
- Crude oil futures continue to climb. This price climb will effect inflation numbers.
- Bullish positioning in US equities is getting crowded.
- Market leverage has shifted from margin borrowing to options.
- Global corporate defaults are at the highest level since 2009.
- The scale of the world’s largest stock markets by country:
- Here is the evolution of crude oil production in the US by source.
- Here is a look at the earnings revision divergence between tech and the rest of the market.
Source: UBS Research; @dailychartbook
- Few companies can deliver consistently high sales growth rates.
- CRE delinquency rates remain elevated.
- AI usage saturation?
Great Quotes
“The best way to teach your kids about taxes is by eating 30 percent of their ice cream.” – Bill Murray
Picture of the Week
Jefferson Memorial during the Cherry Blossom festival
All content is the opinion of Brian Decker
