The corporate buyback binge has reached historic proportions, with repurchases by S&P 500 SPX, -0.61% companies in the last three months of 2018 marking the fourth straight quarterly record high.
That’s never happened before.
“Companies continued to spend more of their tax savings on these share repurchases as they boosted earnings through significantly reduced share counts,” S&P Dow Jones Indices analyst Howard Silverblatt explained last month.
Top “buyback queens” in 2018 included Apple AAPL, -0.30% Oracle ORCL, +0.20% Wells Fargo WFC, -1.51% and Microsoft MSFT, -0.54%
But what happens to these shares and the rest of the investment landscape when it stops? Wolf Richter of the Wolf Street blog chewed on the notion of a stock market without its biggest source of demand, and the picture he paints, with the help of Goldman Sachs GS, -0.95% isn’t pretty.
“Too painful to even imagine,” he wrote. “Share buybacks are the relentless bid, buying at any price, buying not to acquire assets at a low price but buying with the specific purpose of pushing up prices.”
Read: ‘How is this possible?’ Analysts puzzle over stock market’s rally amid equity-fund exodus
To get a sense of what the biggest investors have been up to over the past few years of this broad market push, Richter cited this data:
As one can see, the total amount shed comes to about $1.1 trillion. That’s a lot of selling pressure, no doubt, but it’s no match for the massive $2.95 trillion in share buybacks that overpowered it.
“So it all worked out. As investors were selling, companies were buying back their own shares. And markets boomed. But what would happen to stocks in a ‘world without buybacks?’” Richter asked, referencing the Goldman note.
He explained that some members of Congress are now targeting share buybacks and proposing legislation, which apparently has Goldman Sachs concerned that the bull market may be hobbled.
Read: Marco Rubio rolls out his own plan to limit stock buybacks
“It would be a truly unspeakably, nay, unthinkably gruesome nightmare that no politician would want to be responsible for: a world in which stock prices would decline!” Richter said, cheekily.
But in all seriousness, he laid out what would happen in such a scenario. Essentially, demand would evaporate, volatility would rise, earnings-per-share would take a hit and the bull market “would lose the force that powered it.”
In other words, we’d have a market left to fend for itself and embark on its own price discovery. “No one would be ready for it,” Richter said. “This type of world is just too painful to even imagine these days.”
The “relentless bid” didn’t do much for stocks on Tuesday, with the Dow Jones Industrial Average DJIA, -0.72% down triple digits, at least check.
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