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Buyback Blackout Leaves U.S. Stocks on Own Prior to Earnings

U.S. stocks are entering part of the year when one of their biggest support systems is turned off.

Buybacks, which reached a monthly record in February and have surged so much they make up about 2 percent of daily volume, are customarily suspended during the five weeks before companies report quarterly results, according to Goldman Sachs Group Inc. With the busiest part of first-quarter earnings seasons beginning in April, the blackout is getting started now.

While the data isn’t conclusive, owning stocks during the five-week stretch when repurchases were curbed has generated a return that trails the market average over the past two years, according to data compiled by Bloomberg. That’s not surprising to Eric Schlanger of Barclays Plc, who says companies buying back shares have helped keep equities aloft.

“Blackout periods are on radar screens now because of valuations, the length of the bull market, and the consensus that buybacks have been a major part of the bull market,” Schlanger, head of equities for the Americas at Barclays, said by phone. “With the S&P up around 2,100, people are going to be more attuned to possible fractures or previous areas of support changing than they were at 1,400.”

Companies in the Standard & Poor’s 500 have spent more than $2 trillion on their own stock since 2009, underpinning an equity rally in which the index has more than tripled. They spent a sum equal to 95 percent of their earnings on repurchases and dividends in 2014, data compiled by S&P and Bloomberg show.

Natural Buyer

Equities snapped back last month as the benchmark gauge rallied the most since 2011, sending the Nasdaq Composite Index to near record highs, while companies announced an average of more than $5 billion in buybacks a day. Reducing them may be enough to slow stock advances, according to Michael Stiller, an associate director with Nasdaq Advisory Services.

“When you have a natural buyer every week it clearly has had an impact,” Stiller, who works with finance and investor relations officers of companies on all exchanges, said by phone. “Typically leading into earnings, returns are muted because buybacks aren’t that active, and also because things slow down on the investors’ side.”

The S&P 500 climbed an average 0.64 percent in the five weeks of trading leading up to the busiest sections of quarterly earnings since 2013, compared with the average 1.7 percent advance in every other five-week period throughout the years, data compiled by Bloomberg show.

Blackout Losses

“It’s that big a force out there that when it stops it does affect performance,” Craig Hodges, who oversees $3 billion as chief executive officer of Hodges Capital Management Inc. in Dallas, said in an interview. “People say buybacks are artificial, but it’s not -- it changes a company’s dynamics.”

At the same time, blackout periods were far from the worst stretches of their respective years. Periods of protracted stress such as the first weeks of October 2014 yielded much worse returns. Among the eight blackout periods in 2013 and 2014, five returned less than the average five-week return.

Moratoriums on discretionary buybacks, repurchases that are not scheduled as part of a larger plan, are usually instituted by companies in the month or so before an earnings release date, and any weakness presents an opportunity for investors, Goldman Sachs analysts led by David Kostin said in a note to clients Monday. Firms accounting for the majority of buybacks in the S&P 500 will report earnings from April 13 to April 27, according to Goldman.

Self-Imposed Policies

“They’re self-imposed policies to manage the risk of trading on the basis of non-material public information,” said David Martin, a senior counsel at Washington, D.C.-based Covington & Burling LLP and former director of the Securities and Exchange Commission’s Division of Corporation Finance. “Most companies have an open window period or a blackout period.”

Share repurchases accounted for 1.9 percent of stock trading on average in 2013 and 2014, compared with 1.2 percent in the preceding four years, according to data compiled by JPMorgan Chase & Co. and Bloomberg. Companies executed more than $1 trillion in buybacks in those two years, the most in any comparable period on record since S&P began collecting data in 1998.

Technology companies repurchased the most stock in 2014, at $122 billion, according to data from Barclays. Consumer discretionary companies bought back $102 billion of shares, while telecommunication companies purchased $2.3 billion.

“What we’ve seen is companies being very aggressive and using market pullbacks to pick up stock,” said Nasdaq’s Stiller. “If you have buyback capacity you’re going to use it in weakness, and we see them being much more active.”

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