Goldman Buyback Desk Saw Orders Rise ‘Dramatically’ During Rout
ByGoldman Buyback Desk Saw Orders Rise ‘Dramatically’ During Rout
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Companies are ‘senstive’ to share prices, David Kostin says
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Repurchases have helped stem losses during past market turmoil
As investors suffered through the year’s biggest equity rout Monday, one of the market’s most important players emerged as a buying force.
Corporate America bought back shares at a furious pace as the S&P 500 plunged 3%, according to activity at the Goldman Sachs Group Inc. unit that executes repurchases for clients. Since then, the equity benchmark has rebounded 2.3%. A similar surge in buybacks during May’s rout helped establish a market bottom.
“On Monday when the market dropped, the Goldman Sachs buyback desk saw executions increase dramatically,” David Kostin, the firm’s chief U.S. equity strategist, said on Bloomberg TV with Alix Steel and David Westin. “Companies are sensitive to the level of stock prices.”
They took advantage of lower prices to snap up shares that before this month traded at all-time highs and elevated valuations relative to earnings. The S&P 500 tumbled 6% over six days through Monday as the Federal Reserve signaled a shorter easing cycle and the U.S.-China trade war escalated.
The willingness to buy the dip contrasts with hedge funds, who according to Morgan Stanley have cut their equity exposure to the lowest level since 2016.
No one really knows whether corporate demand is enough to soothe market anxiety, but history shows it has reliably prevented equity losses from snowballing. In the middle of the sell-off in May, buybacks from Bank of America Corp.’s corporate clients surged 23% for the eighth busiest week in a decade. The market bottomed on the first day of June.
During the February rout in 2018, the rebound in stocks came in a week when Goldman Sachs’s corporate-trading desk saw the busiest buyback orders ever.
Buybacks have climbed in recent years even as they’ve come under pressure from politicians who are focusing on corporate governance as an election issue. While far from being a consensus view, repurchases have been a bull case that strategists like Goldman’s Kostin have cited for the 10-year rally to keep going. Companies in the S&P 500 will repurchase a record $940 billion of shares this year, the firm estimates.
Read more: Buyback Frenzy Means Fed Can’t Lift the Economy Like It Used To
