The stock market has rallied despite a drop in buybacks. The market could get a boost when buybacks ramp up again.
The stock market has managed to rally without buybacks, once a vital mainstay of the decade-long bull market. This leaves hopes that stocks could get a boost next year when companies start buying back shares again.
Share buybacks dried up in the second quarter, as U.S. companies, saving their cash, focused on cutting costs and managing liquidity risk amid the pandemic. According to the S&P Dow Jones indices, stock buybacks of S&P 500 companies fell 55% to $88.7 billion in the second quarter, the lowest since March 2012.
As earnings fell, share buybacks weren’t a priority as companies scrambled to consolidate their cash reserve. In the second quarter, 252 of the S&P 500 companies reported little or no buybacks, almost doubling the number in the same quarter last year.
Tech companies continued to lead the buyback activity, spending $39.6 billion on share repurchases in the second quarter. Although activity was down 37% from the previous quarter, the sector accounted for over 40% of all buybacks in the S&P 500.
Apple was the largest spender in the buyback program, paying $17.6 billion in the second quarter, ranking 11th in S&P 500 history.
Buyback activity could slowly pick up as the economy continues to recover from the crisis, giving the market new momentum.
Ryan Detrick, senior market strategist at LPL Financial, says:
The good news is as the economic recovery continues into 2021, there’s a good chance the tailwinds of continued stock buybacks will increase. Although the economic recovery is the most important thing for stocks here, stock buybacks can provide a lot of support and is another likely reason to think this bull market that is only six months old has plenty of life left in it.
Howard Silverblatt evaluates the landscape for earnings and buybacks. Watch the video below:
The stock market still pulled off an epic rebound without the support of buybacks. After hitting a low on March 23, the S&P 500 soared more than 50% to a new high on August 17, completely erasing its coronavirus-induced losses. The stock market fell below this new high recently amid a selloff in tech stocks.
Retail investors fueled a frantic buying boom in the stock market this year. They have opened a large number of accounts with online brokerage firms. Charles Schwab, TD Ameritrade, E-Trade, and Interactive Brokers all saw substantial increases in business, while millennial-favorite Robinhood registered 3 million new accounts in the first four months of 2020.
Improving economic numbers and positive news about a coronavirus vaccine also helped to fuel the rally.
The historic rally followed unprecedented fiscal and monetary stimulus. The Federal Reserve has cut interest rates to near zero and launched an open-ended quantitative easing program. Americans received trillions in unemployment assistance and direct payments. Congress’ $2 trillion stimulus deal prohibits any business that receives a government loan from buying back shares up to a year after it is paid off.
Companies have reduced their operations so drastically to increase their free cash flow that they will be able to start buying again next year. Future buybacks are a big bull sign that investors shouldn’t overlook as they will provide a further boost to the stock market rally.
Disclaimer: This article represents the author’s opinion and should not be considered investment or trading advice from CCN.com. Unless otherwise noted, the author has no position in any of the securities mentioned.
Last modified: September 23, 2020 2:30 PM