The End Of The Buyback Blackout Period Is Helping Stocks

Buybacks Helping Stocks

There were a lot of reasons stocks fell during the Q1 earnings season. The results were great, but stocks were in the midst of a sentiment shift catalyzed by the unwind of the short volatility trade. Since then, fears of geopolitical strife and trade wars have hurt performance. One of the lesser discussed possible causes of the weak market was the buyback blackout period which occurs during earnings season.

Let’s clear things up about buybacks. They don’t cause equity bubbles because they are simply returning cash to shareholders in a tax efficient way. They are procyclical, but so is most corporate activity. Dividends are less cyclical than buybacks because firms take pride in keeping them steady. However, coming along with that consistency is the fact that most companies don’t raise their dividends as much as they could during expansions.

Procyclical activity looks great during the beginning and middle of the cycle, but terrible at the end of the cycle. You can’t just focus on the one time buybacks are bad to make an argument against them. Borrowing money to buy back stock is risky behavior which could hurt the liquidity of a firm for short term gain. However, that’s a function of leverage which can be utilized for M&A activity as well.

There was a need for clarification because the bears love to blame buybacks for equity bubbles, citing the 2008 financial crisis where buybacks accelerated into the crash and then fell afterwards. That’s circumstantial evidence. Just because buybacks are relatively new doesn’t mean every single change in the market has been caused by them.

(Click on image to enlarge)

Now that the blackout period is over, the renewed repurchases are helping boost stocks. As you can see from the chart above, buybacks are projected to be $650 billion which is more than the peak in 2007. Since this is in nominal terms, it’s not surprising to see buybacks beat the last cycle peak since profits are higher.

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