September was the worst month for US stock benchmarks so far this year.1 There are lots of explanations doing the rounds – fiscal dominance in the US driving the sell-off in yields, weaker economic data, the typical reaction from equity markets to the last rate hike, and the bear steepening of the yield curve. All, no doubt, are playing a part. But the old adage that markets go down when there are more sellers than buyers rings true, and the end of September has seen a confluence of flow from short gamma dynamics and CTAs.
It is also the blackout period for corporate buybacks ahead of Q3 results. Goldman Sachs estimates that around 90% of US corporates are in buyback blackout now. This comes against a backdrop of already ebbing buyback activity from record levels in 2022, as the cost of borrowing to buy back stock has changed the picture somewhat
The latest data shows quarterly share buybacks dropped to the lowest level since the height of the Covid 19 pandemic.2
Figure 1. US share buybacks fall to three-year low in second quarter of this year
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Source: S&P Global.
US companies spent $175 billion buying back shares in the three months to June, a 20% drop from the same quarter last year and a 19% decline from the first three months of 2023. For the twelve months ending June 2023, buybacks were $812.5 billion, down from the record $1.005 trillion for the prior 12-month period to end-June 2022.
We wrote in detail about the impact of buybacks on price in 2019 in a paper called “Stock Buybacks: Freeing the Invisible Hand or Legitimising the Fat Finger.” Based on research conducted by our trading operation, we were able to estimate the frictional impact of buybacks on market returns, which amounted to approximately +300bps annually for the Russell 1000 in the period we studied.
Lower buyback activity is a likely feature in a higher-rate world, which, all things equal, suggests less support for prices than in recent years. That said, they’re not going away altogether, and the blackout period will end in October, with November and December potentially a more active period for corporate buybacks.
With contributions from Ed Cole, Managing Director of discretionary investments, and co-portfolio manager of equity solutions at Man GLG.
1. https://www.bloomberg.com/news/articles/2023-09-26/asia-stocks-set-to-decline-amid-bearish-sentiment-markets-wrap?srnd=markets-vp
2. https://www.spglobal.com/spdji/en/corporate-news/article/sp-500-q2-2023-buybacks-decline-188-as-sector-expenditures-shift-again/
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