Stock market investors may be feeling a sense of deja vu. Toward the end of each quarter this year, the Fed has hiked rates and stocks have sold off, only to rally as earnings season started. A likely key contributor in each downdraft has been a pause on corporate stock buybacks in the “blackout” period leading up to earnings.
Stock buybacks have been a key underpinning of the stock market this year, with companies poised to authorize a record $1 trillion in buybacks, according to Goldman Sachs. Apple (AAPL) alone authorized a $100 billion stock buyback. The good news is that the flow of buybacks will turn back on over the next several weeks and once again help spur another earnings season stock market rally.
Keith Parker, chief U.S. equity strategist at UBS, noted in a Monday report that corporate stock buybacks and dividend payments fell “near trough levels” in the past week. But he advises investors to get ready for a turnaround. The UBS daily corporate liquidity signal shows that the combination of buybacks and dividends will more than triple over the next six weeks, “rising from the current (roughly) $14 billion weekly pace to $48 billion by mid-November as earnings are announced and blackouts end.”
Both stock buybacks and dividends free up more cash for investors to put to work. Yet as that liquidity entered a brief dry spell, another Fed rate hike and ballooning Treasury issuance also have helped drain liquidity and created headwinds for the stock market. Fed rate hikes, for example, push up interest rates for investing on margin.
Meanwhile, the Fed last week unwound $19 billion worth of government-bond buys made in the wake of the financial crisis, as quantitative easing has turned to quantitative tightening. That was the biggest drop in the Fed balance sheet since late July, Parker says.
Parker also notes that weekly S&P 500 returns have been inversely correlated to the size of Treasury issuance, which has been on the rise as the federal deficit heads toward $1 trillion in the new fiscal year.
The unofficial blackout period for corporate and insider stock purchases generally goes from the last two weeks of a quarter until after earnings are announced. The rule isn’t hard and fast. Corporations can execute a buyback within a blackout period if they have a preset rule for doing so.
While the apparent turning off of stock market liquidity has been a downer for the stock market as a whole, it doesn’t fully explain the rotation that’s been going on within the market. Value stocks like Exxon Mobil (XOM) and Bank of America (BAC) have outperformed growth stocks since the sell-off began amid firm oil prices and higher long-term interest rates.
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