Buyback 'Blackout' to Test Stock Market -- WSJ
September 19 2018 - 3:02AM
Dow Jones News
By Amrith Ramkumar
This article is being republished as part of our daily
reproduction of WSJ.com articles that also appeared in the U.S.
print edition of The Wall Street Journal (September 19, 2018).
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 because of 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 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.
The current blackout period comes during another remarkably
placid period for U.S. stocks. The Cboe Volatility Index, which
measures expected swings in the S&P 500, has dropped in five of
the last six sessions and remains near historically low levels.
Meanwhile, the S&P 500 has gone 59 trading days without a
move of 1% in either direction, the longest streak since January,
according to Dow Jones Market Data. It is also only the fifth time
in the past five years the measure has posted a such a streak for
longer than 50 sessions.
Consistent corporate profits coupled with robust economic growth
has placated investors. Analysts estimate third-quarter earnings by
companies in the S&P 500 will increase by 20% from a year
earlier. That would be the third-fastest quarterly growth rate
ever, trailing only the two previous quarters, according to
FactSet. And the U.S. economy expanded at a rate of 4.1% in the
second quarter, the quickest pace in nearly four years.
Because major indexes have been unusually calm lately, sudden
outsize market moves during the blackout period could sour investor
sentiment toward stocks, some analysts say. That occurred when the
market tumbled in February.
With roughly 20% of the S&P 500 already unable to buy back
shares, the U.S. announced new tariffs on about $200 billion in
Chinese goods late Monday. Beijing responded with duties on $60
billion of U.S. products.
The stock market actually rose after news of the new levies this
week, as the tariffs taking effect later this month were less
stringent than many investors had feared. But some analysts expect
trade anxiety to build ahead of planned November meetings between
President Trump and Chinese leader Xi Jinping. Both countries have
laid out plans to end their monthslong tariff fight before those
meetings.
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.
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, which itself has driven nearly
a quarter of the increase in share repurchases this year.
But after weeks of a quiet trading, others believe a quick
pickup in volatility could cause investors to reassess the market
backdrop.
--Michael Wursthorn contributed to this article.
Write to Amrith Ramkumar at amrith.ramkumar@wsj.com
(END) Dow Jones Newswires
September 19, 2018 02:47 ET (06:47 GMT)
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