Share buyback “umbrella” won’t stop Wall Street crash

Experts say stock buybacks, which hit a record in 2021, are still going strong in 2022, but not for long. An “umbrella” will not help stop the market crash. Photo: Getty Images.

  • Share buybacks hit a record high in 2022 on the S&P 500

  • This year a good rhythm is being maintained but it is expected to stop soon

  • The economic environment makes it increasingly difficult to allocate funds

Share buybacks by companies are traditionally offered as a form of shareholder bonus that also has the potential to support the market.

As analysts at Charles Schawb recall at the end of 2021, these operations were “one of the 11-year bull market drivers that followed the Great Recession, adding about $4 trillion to the market between the start of 2009 and 2020.

And the market, which entered a bear cycle on June 13 – the fourth in the past two decades – really welcomes whatever support there might be.

Share buybacks reduce supply in the stock market, thereby increasing the relative value of each security and earnings per share. Some companies use it to reduce stock dilution that occurs when directors and employees are compensated with it.

Last year, as there was extraordinary liquidity and high margins in the company’s earnings, was a record for this type of buyback. The companies that make up the S&P500 index have committed about $882 billion to these operations. register

Will there be this year of tight liquidity, fears of market decline and stagnation, and can the market count on this support?


Share buybacks continue into 2022, but…

Morgan Stanley recalls that buybacks grew 12% annually in the post-financial crisis period (between 2010 and 2019). Analysts at this investment bank explained that preliminary data “indicates that the strength of the buyback continued throughout the first quarter.”

Growth so far has gone hand in hand with technology, financial and healthcare companies.

But “Corporate Status“Or the idea that buybacks at a certain point could act as support for a sharp drop in value is difficult to sustain because 2022 is not a year like the year before. The support that these purchases can provide is not, for the time being, stronger than the sentiment that accompanies Continuous decline in indicators.

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If corporate accounts begin to feel the pressure, share buybacks are no longer in the managers' plans.  Photo: Getty Images.

If corporate accounts begin to feel the pressure, share buybacks are no longer in the managers’ plans. Photo: Getty Images.

Morgan Stanley analysts suggest there may still be $870 billion earmarked for share buybacks, just $10 billion less than the same period last year.

But they state that cost pressures “are driving down company margins and pose risks to earnings per share estimates.” Options managers should buy shares at significantly lower levels than in 2021 or maintain liquidity as a precaution. , at a time of tightening financial measures. conditions and economic slowdown.

Does not accompany the economic situation

In this sense, Daryl Cronk, Head of Systems and Information for Wealth Management at Wells Fargo, explained that with rising “transportation, logistics, staffing, and core costs putting pressure on profit margins and revenue growth, CEOs and financial advisors could exercise more caution and try to preserve liquidity.” At a time of economic uncertainty.

This Wells Fargo analyst agrees with Morgan Stanley in explaining that buybacks are closely linked to confidence and sentiment from CEOs and companies, “both of which are not in the right direction as the second half of the year approaches,” Kronk explains.

Samir Samana, a global strategist for the same bank, explained that buybacks will actually slow in the second half of the year “with profits slowing (and even contraction)”, and his expectation that they will pause for some sectors such as finance, as happened during the pandemic.

“I’m not saying this is as severe as in the pandemic, but the idea for investors is that share buybacks tend to correlate positively with earnings/cash flow expectations, which will get a bit more complex,” Samana says.

Morgan Stanley analyzes indicate that not only will it be impossible to repeat the growth of 2021, but also in 2022 growth will be negative in the second half compared to the previous year, when these are usually periods when there is a greater impulse than this purchase of proprietary securities before companies.

This pattern of strong buying is usually broken in the second half of the year when the market is bearish, although in this market environment more is bought with less money.

Investors are currently being cautious, and given the choice of bonus, they prefer a bonus that can be put into their pockets.

The S&P 500 repo index, which usually does better than the general index, is down 17.29% so far this year compared to 22% for the S&P 500, while the S&P 500’s high-earnings index is down 4.3% in the period.

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