Booming Buybacks No Magic Bullet for This U.S. Equity Tantrum

  • Goldman Sachs repurchase desk say most orders ever last week
  • Bull market pillar intact but not enough to thwart correction

Last week’s histrionics in U.S. equities occurred as one thing remained constant: plentiful share buybacks. For bulls, that’s good and bad news.

Evidence that buybacks held up comes from Goldman Sachs Group Inc.’s corporate agency desk, which received record orders from clients for repurchases in the five days ended Friday, according to a note obtained by Bloomberg. The stretch includes two days in which the Standard & Poor’s 500 Index slid more than 1 percent and two in which it climbed more than 2 percent.

While the repurchases may have helped limit losses, they also show that companies alone don’t represent sufficient buying power to prevent every selloff in equities. At the lowest levels a week ago, the S&P 500 was down more than 12 percent from its May high, recording its first correction in almost four years.

“Corporate buybacks may not stop a severe decline, but they may mitigate it,” said Peter Tuz, who helps manage more than $430 million as president of Chase Investment Counsel Corp. in Charlottesville, Virginia. “So many companies have these giant plans authorized, have lots of cash left. After a horrible couple of days it’s no surprise they put it to work.”

As stock prices have fallen, U.S. companies have stayed aggressive in buying their own shares. The same group at Goldman had its busiest day since 2011 on Aug. 12, when the value of equities repurchased set a record as the S&P 500 staged its biggest single-day turnaround in three years, according to an earlier note.

A Goldman Sachs spokesman, Michael DuVally, declined to comment.

“Buybacks were the bungee cord that kept a declining market from crashing on the rocks below,” Sam Stovall, a strategist at S&P Capital IQ, said in a phone interview. “Maybe it has to do with timing, as we crossed the 10 percent threshold and company managements started scooping this up. A cynic would say it’s because without aggressive share repurchases, their numbers would be crap.”

Corporations have emerged as one of the biggest sources of fresh cash in the stock market, eclipsing even mutual funds with more than half a trillion dollars spent last year, according to data compiled by S&P Dow Jones Indices. In the second quarter of 2015, S&P 500 companies listed buybacks or dividends among the proceeds in $58 billion of bond deals, the most on record.

In all, U.S. companies have bought back about $260 billion in stock in 2015, bringing the overall total since the bull market began to more than $2 trillion, according to S&P Dow Jones. Even so, companies have gotten less bang for the buck this summer. The S&P 500 Buyback Index, which compiles companies doing the most repurchases, is down about 9 percent since May, trailing the equal-weighted S&P 500 by more than a percentage point.

“You wonder what the market would have been like without that kind of activity and that’s a valid question,” Tuz said. “You have to assume they lent some support to the overall market.”

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