Buyback 'Blackout' to Test U.S. Stock Market
September 18 2018 - 8:29AM
Dow Jones News
By Amrith Ramkumar
A steady stream of robust earnings and economic data has
virtually zapped volatility from U.S. stocks, but a coming freeze
on share buybacks could challenge the market.
Companies typically don't repurchase their own shares in the
month before reporting quarterly results due to regulations, and
with the third quarter coming to an end, 86% of the S&P 500
will be temporarily restricted by Oct. 5, according to Goldman
Sachs analysts led by David Kostin.
That could remove a key source of support to financial markets:
Buybacks currently account for the largest percentage of cash
spending by companies in the benchmark index for the first time in
10 years, the bank said in a note Friday.
Share repurchases can play a role in boosting stock prices
because they lower the number of shares outstanding -- driving up
per-share earnings even without overall profit growth. Company
demand can also trigger stock-price gains.
Analysts have said record stock buybacks have underpinned recent
market advances, helping major indexes stay near all-time highs
despite ongoing U.S.-China trade tensions and a rout in emerging
markets. Historically, companies used the most cash on capital
expenditures -- spending on factories, equipment and other goods.
However, in the first half of the year, share buybacks increased
nearly 50% and approved repurchases are on pace to set a new
full-year record above $1 trillion, Goldman said.
That is why the imminent blackout period for buybacks injects
uncertainty for investors and traders. Returns from the S&P 500
during blackout and nonblackout periods have been roughly in line
going back to 2000, but market volatility tends to be higher when
buybacks aren't allowed, the Goldman Sachs analysts found.
Although major indexes have been calm lately, sudden outsize
market moves could sour investor sentiment toward stocks, analysts
say. That occurred when the market tumbled in February.
With nearly 20% of the S&P 500 already unable to buy back
shares, Beijing is debating how to retaliate against fresh U.S.
tariffs on $200 billion of Chinese goods announced late Monday.
And next week, the Federal Reserve is expected to raise rates
and update its projected path for future increases, potentially
stoking fears that tighter financial conditions could challenge
companies and consumers.
While some analysts aren't as concerned about the blackout
period because almost 80% of the growth in buybacks has been
concentrated in 10 companies, most notably Apple, a quick pickup in
volatility could cause investors to reassess the market
backdrop.
Write to Amrith Ramkumar at amrith.ramkumar@wsj.com
(END) Dow Jones Newswires
September 18, 2018 08:14 ET (12:14 GMT)
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