A huge driver of stock prices reportedly got off to its worst start in 7 years, but that could change soon, experts say.
Companies in January announced just $13.7 billion of share repurchases, the slowest opener since 2013 and coming off a 2019 that saw a 30% drop-off from the previous year, CNBC reported, citing AllianceBernstein.
AllianceBernstein strategists say the trend could be “worrying” but it is not expected to last.
Buybacks have been a major driver of performance in the nearly 11-year-old bull market.
“If this is a sign of a much lower run rate of buybacks it would be worrying given how dependent the market is on corporate buying of equities,” AB strategist Mark Diver said in a note. “We do not think this is the case,” Davis wrote.
CNBC reported that this month so far has exhibited “a much stronger appetite for share buybacks,” with $34 billion announced through Feb. 14.
Diver expects share buybacks to eventually increase.
“Companies with large buyback programs are perhaps becoming more discerning in the timing of execution of their buyback programs and maybe delaying repurchases until a more attractive entry point presents itself,” he wrote, adding that, “This seems plausible to us and at least a partial explanation of the weak data in January.”
Meanwhile, investment guru and Rosenberg Research chief economist David Rosenberg is warning that when the share buyback craze stops, this bull market stops.
“The ratio of corporate debt-to-GDP is at all-time highs. In addition to the unprecedented fiscal stimulus at this late stage of the economic cycle, and accompanying trillion-dollar deficits, we also have corporate leverage ratios at record levels,” he wrote in the Financial Post.
“An enormous volume of corporate debt has been issued exclusively for the purpose of buying and retiring shares. This includes both buybacks and acquisitions of other companies,” he wrote.
“And in classic mature-cycle fashion, we are seeing some cracks emerge in the junkiest parts of the U.S. credit market. This is an area to be focused on as leveraged credits are in an eerily similar situation to what was surfacing out of the subprime mortgage market back in 2007,” he warned.
“In any event, we are light years away from a stable equilibrium. The proverbial canary in the coal mine usually resides somewhere in the credit market (think of LBOs in 1989 and subprime mortgages in 2007).”