Stocks Lose Critical Buyer at Worst Time as Selloff Picks Up

(Bloomberg) -- The stock market’s missing a key participant as the second quarter kicks off with a rout.

Corporate America is stuck on the sidelines as the S&P 500 Index plunges to its lowest level since early February. That’s to comply with regulations under which companies refrain from discretionary stock buybacks for about five weeks before reporting earnings through the 48 hours that follow. So, with first-quarter reporting season kicking into high gear in two weeks, companies must sit on their hands while the market fizzles.

The timing of discretionary buybacks has gained traction in recent years with corporate appetite dwarfing all other investors as the biggest source of demand for U.S. stocks. Strategists such as Goldman Sachs Group Inc.’s David Kostin have pointed out that it’s no coincidence the late-January selloff occurred during a blackout period.

S&P 500 firms have bought back almost $4 trillion of their own shares since the bull market began nine years ago, data compiled by S&P Dow Jones Indices show.

That demand helped mitigate damage in early February when stocks tumbled into the first correction in two years. Goldman Sachs’ buyback desk had its busiest week ever during the rout and companies were called “basically the only buyers.” Volume in S&P 500 stocks was about 7 percent above the 30-day average Monday.

Not everyone agrees that the buyback blackout is partly to blame for Monday’s selloff. According to Marko Kolanovic, JPMorgan Chase & Co.’s global head of quantitative and derivative strategy, the majority of buybacks are usually done through preset programs that are not subject to blackout. Moreover, stocks typically go up more when repurchases are announced than when the transactions actually occur.

“The whole story about blackout is misconception,” Kolanovic wrote in an email.

So, what could be behind the selloff? Kolanovic’s team last week attributed the recent downturn to an “irrational response” to global trade tensions. The S&P 500 is trading at below-average valuations even as earnings growth is picking up, a sign that any weakness would be worth buying, the strategists wrote in a March 27 note.

A basket of companies compiled by Goldman Sachs with the highest percentage of buybacks as a share of market capitalization isn’t coming under acute pressure on Monday, however, as technology stocks continue to lead the way down.

To contact the reporters on this story: Luke Kawa in New York at lkawa@bloomberg.net, Lu Wang in New York at lwang8@bloomberg.net.

To contact the editors responsible for this story: Jeremy Herron at jherron8@bloomberg.net, Andrew Dunn, Eric J. Weiner

©2018 Bloomberg L.P.