Part–but certainly only part–of the weakness in U.S. stock prices in October came from the blackout period on companies buying back their own shares. Many companies have self-declared buyback blackout periods running from a couple of weeks before the company reports earnings to a few days after the report. The idea is that the company doesn’t want to send any signals that litigious investors and traders could use to sue if the company delivers disappointing earnings while continuing to buy shares.
So are buybacks a big enough source of cash to support stock prices or even drive them upward?
You bet. And here are some numbers.
JPMorgan Chase strategist Marko Kolanovic has told clients that “Buyback activity is expected to increase significantly going forward.” Company purchases of shares will run at an annualized pace of $200 billion to year-end, he estimated. Deutsche Bank has estimated that the end of earnings season bans on buybacks will free up $110 billion in planned buybacks this week, after last week saw about $50 billion freed up for purchases. The total of planned buybacks rises to $145 billion next week, according to Deutsche Bank.
And while almost no company ever buys back all the shares it announces, the sell off in U.S. stock markets is likely to encourage company boards to commit real money to back up their promises. Actual demand from U.S. companies (including purchases by shareholders who reinvest their dividends) will rise to $48 billion a week by mid-November, up from $10 billion a week currently, UBS Group estimates.
That’s a lot of cash committed to buying shares–enough to put a floor under stock prices, in my opinion.
