Banks Fueled $52 Billion in Buybacks Amid Post-Brexit Bounce

  • U.S. companies announced $52 billion of buybacks last week
  • Repurchases ramped up after 33 banks passed Fed stress test

In the background of another epic bounce for U.S. stocks was the bull market’s oldest friend: buybacks.

American companies announced $52 billion of repurchases last week alone, following the Federal Reserve’s approval of capital plans for 33 financial firms, according to data compiled by Birinyi Associates. That pushed total buybacks in June to more than $65 billion, the most since February.

The cascade of announcements came as the S&P 500 Index was erasing a loss that swelled to more than 5 percent after the U.K. voted to exit the European Union.

The Fed’s vote of confidence in the ability of U.S. banks to withstand a severe economic shock cleared the way for large firms from Morgan Stanley to Bank of America Corp. to outline planned share repurchases last week. Buybacks have been a primary source of buoyancy for the second-longest bull market in history -- a pillar of strength that the Fed has been happy to fuel with dovish monetary policy.

“It was helpful to the market in the wake of Brexit that all those announcements came last week,” said John Carey, a Boston-based fund manager at Pioneer Investment Management Inc., which oversees about $230 billion. “The central bank has signaled that they’ll do what they can to support markets by continuing to supply cheap credit and bond-purchasing activity.”

Resurgent buybacks may help ease or even erase a falloff earlier in the year. Through the first four months of 2016, announced repurchases were down 38 percent from a year ago.

The S&P 500 slipped 3.6 percent on June 24, the first day of trading after the U.K. voted to leave the EU. That Friday loss marked its biggest daily decline since August. The benchmark index fell another 1.8 percent the following Monday before reversing course and rising in four straight sessions to end the week. The gauge’s 5.1 percent increase over the period got it back within 0.5 percent of where it was before the Brexit referendum.

Financial shares had the most at stake in the Fed’s stress tests, and when the central bank gave the all-clear last Wednesday, they surged on the news. An index of financial stocks in the S&P 500 climbed 3.9 percent across the following two days.

JPMorgan Chase & Co. announced $10.6 billion in buybacks, the most out of any financial firm last week, according to Birinyi Associates data. Citigroup Inc. authorized $8.6 billion in repurchases, while Bank of America and Morgan Stanley said they’ll buy back more than $3.5 billion each.

Prior to the June surge, buyback activity in 2016 was looking meager, down 38 percent from the prior year. While the $357 billion in repurchases announced in the past six months still lags the first half of 2015, it’s 18 percent above the average for the period since 2006, Birinyi Associates data show.

The U.S. stock recovery last week also received a boost from investors closing bearish options bets they’d made heading into the Brexit decision. Short sales had reached the highest since the financial crisis amid the uncertainty leading up to the referendum. The S&P 500 also got a lift from deal activity, as Mondelez International Inc. bid $23 billion for Hershey Co. on Thursday.

Still, U.S. stocks are going to need alternative sources of strength going forward, like improved growth for both profits and the overall economy, according to Carey. The S&P 500 is expected to see earnings contraction of 5.4 percent for the second quarter, according to a survey conducted by Bloomberg.

“We’re seeing some steps that could prop up the U.S. market in the near-term,” said Carey. “At some point we’re going to need economic growth and improving earnings to keep the market going higher.”

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