In search of stability, Wall Street eyes return of stock buybacks

Given the rocky start to 2016, Wall Street is hoping Corporate America – a big buyer of U.S. stocks in recent years – will resume purchasing their own stock as the quarterly earnings season winds down and the regulatory-driven share-repurchase “blackout” is lifted.

Stock buybacks have been a huge source of buying power for the U.S. stock market in recent years. Companies in the Standard & Poor’s 500 index spent $1.45 trillion of their own cash to buy back their own stock since the start of 2013, according to S&P Dow Jones Indices. Corporate share repurchases have topped $116 billion in 10 straight quarters. Third-quarter 2015 buybacks, the most recent data available, totaled $150.6 billion.

That buying power, however, was put on pause at the start of the year, as companies are barred from purchasing their own shares in the month leading up to the release of their quarterly profit results.

But corporations “appear on track to resume buyback activity soon,” says David Kostin, chief U.S. equity strategist at Goldman Sachs, as nearly 75% of the S&P 500 will have reported their fourth-quarter earnings by close of business Friday. Many CEOs, adds Kostin, said in earnings conference calls that they remain committed to share buybacks.

The resumption of corporate buying, Kostin told clients in a recent report, will provide an “important -- and largest -- source of demand for U.S. stocks," as companies take advantage of low interest rates and return cash to shareholders in a sluggish economic growth environment.

January is the slowest month of the year for corporate share repurchases, Goldman Sachs says, with just 4% of all buybacks occurring in January. Kostin believes the lack of corporate buying has contributed to the early-year weakness and amplified volatility in the stock market.

Stocks have been punished in the new year by rising fears of a global recession sparked by a slowdown in China, the persistent slide in oil prices, slowing earnings growth in the U.S. and uncertainty about the pace of Federal Reserve interest rate hikes.

A resumption of corporate buying could be just what the stock market needs to steady itself after a turbulent start to 2016, says Joe Quinlan, chief market strategist at U.S. Trust.

“Share buybacks are typically very weak in January but this market-supporting mechanism is far from spent,” Quinlan told USA TODAY. “Share buybacks will remain a fundamental market driver again in 2016.”

Another factor working in the trend of more buybacks to come is the fact that non-financial companies in the S&P 500 are sitting on $1.78 trillion in cash, according to Aranca, a global research firm. In addition, companies in the S&P 500 Buyback Index, according to Aranca, have posted annualized gains of 23% since 2009, better than the 15% annual return of the S&P 500.

Brian Belski, chief investment strategist at BMO Capital Markets, says that strong earnings will provide even better support to the stock market than share buybacks, although he doesn’t dispute that buybacks offer some support.

Corporate stock buybacks reduce the number of outstanding shares, which boosts the earnings-per-share picture for companies. That’s one reason why Quinlan thinks companies with “robust” buyback programs will “most likely outperform” the broader market.

Corporate buying could reduce uncertainty, adds Quincy Krosby, market strategist at Prudential Financial.

“As the market faces numerous pockets of uncertainty, share buybacks would be welcome, providing a semblance of certainty," she says. "Every quarter you hear the retort that share buybacks are losing their potency with regard to buoying the market. With the tug of war intensifying between the bulls and bears with regard to prospects for the U.S. economy, share buybacks could provide a welcome relief. It would force short covering and perhaps kick start a sustainable rally -- at least for the short term.”

David Kotok, chief investment officer at Cumberland Advisors, stresses that “hope is not a good strategy” – in this case hoping for buybacks to rescue the market. But he says buybacks, if done for the right reason, will be welcomed.

“Buybacks will come because they make economic sense for certain companies,” Kotok told USA TODAY. “So a lower market price will invite more announcements.”