While it is well known that stock buybacks have been among the primary contributors for the solid stock performance in the US in 2018, largely thanks to Trump’s tax reform which allowed companies to use repatriated cash to repurchase stock, the following “Chart of the week” from Bank of America shows clearly just how pervasive the buyback wave has been so far in 2018, as the bank’s clients deployed record amounts of cash to repurchase their own stock.
It will hardly comes as a surprise that in its latest comments on the surge in buyback activity in the current quarter, JPM found that the “unusually strong buyback flow was likely behind the outperformance of US equities during Q2.”
We do not have earnings reports for Q2 yet, but based on the average divisor change of four US equity indices, a proxy for the share count, we estimate that the net equity withdrawal by US companies overall including both financial and non-financial companies tripled in Q2 ($ 150bn) vs Q1 ($ 50bn) as shown in Figure 3.
This big acceleration of the net equity withdrawal was likely behind the outperformance of US equities during Q2.
And yet, after some massive buyback activity in the first half, is the party set to end? Looking at the chart above, BofA’s Jill Carey Hall asks what may be next for buybacks after a seasonally-weak June. Her answer: expect a modest slowdown before another pick up in the late summer:
July is historically slower than June, and weekly trends suggest that buybacks could continue to decelerate in the coming weeks ahead of earnings season before picking up in mid-July through August—historically one of the strongest months for buybacks.
JPM suggests a slightly more subdued picture, writing that “the exceptional strong US net equity withdrawal of $ 150bn for Q2 is less likely to be repeated in the second half of this year, unless an equity market correction induces US companies to step up their share buyback activity as it happened before during Q3 2015 or Q1 2016.”
Meanwhile, the apparent divergence we highlighted earlier in the year has continued to accelerate, because as corporations repurchase record amounts of their stock, retail fund flows into risk assets are slowing. From JPM:
The average inflow in equity or bond fund flows has averaged less than $ 15bn per month since February. This compares to $ 45bn per month in the year to January 2018 for equity funds or $ 65bn per month for bond funds. So post February, the reduction in fund flows has been of the order of $ 30bn per month for equity funds and $ 50bn per month for bond funds. In other words, the wall of retail money that had boosted both asset classes in the year to January 2018 is significantly diminished.
This sharp downshifting in equity and bond fund flows can be seen in Figure 4 which shows the monthly flows across both ETFs and mutual funds at a global level. What Figure 4 also shows is that June was even weaker relative to previous months with practically close to zero flows for both equity and bond funds.
This means that, like back in March, BofA’s (and Goldman’s) buyback desk better have many more record weeks in the coming months, as corporate stock repurchases remain the primary source of demand for equities. But even in the best case scenario, one wonders: after this one time surge, driven thanks to hundreds of billions in one-time repatriated funds…
… where will the dry repurchase powder come from next year when the buyback machine suddenly hit a year-over-year brick wall.