Buyout Bonanza Could Amplify Blackout Effect

The quarterly buyout blackout is growing fast, preventing companies from repurchasing shares for a month before their earnings reports. We shouldn't be too surprised to see some weakness in equities as a result.

About 18% of the index was in the blackout period as of Friday, and 86% will be restricted by October 5. Historically, the S&P 500 has dropped almost 0.4% on average in the final two weeks of each quarter going back to 2000. While returns in blackout and non-blackout periods are similar, realised volatility has been nearly 1 point higher in blackout periods.

Buybacks are the largest share of cash spending by S&P 500 firms for the first time in 10 years; we can understand how much this helped in supporting the markets recently. GS estimates of 2018 stock buyback authorisations to a record $1.0 trillion, a 46% rise from last year.

There are two reasons for this surge, apparently: the first is tax reform which allowed companies to repatriate offshore cash at staggering amounts, which was then used to repurchase corporate stock. Additionally, surging corporate profitability has also led been a critical driver behind the jump in share repurchases. A surge in cash flow from operations created and a high-quality problem for the management: How do we reinvest all this cash?

Unfortunately, the increased cash flow did not transform in additional Capex or another spending for growth. According to GS, for the first time in ten years, buybacks will be the primary use of cash for S&P 500 firms.

While it is evident that the share of operating cash flow used for buybacks increased more than the one used for Capex, the latter has been the more broad base. Buyback are concentrated to fewer companies.

Oddly the market rewarded the companies with significant buybacks vs those who ramped up Capex and are expected to be investing for future growth. For now, for all the debate about whether buybacks are good or bad for the market or the economy - as they take away from other forms of cash use - investors have been quite clear whom to reward, expectations of cash return to shareholders are by far the clear winner over companies which spend on future growth.

That said, in the near-term buyback support for the market may be on hiatus. The reason: the buyback blackout period has begun.


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