All eyes on stock buybacks

Corporate purchases may be the only factor capable of sustaining the equity market's rebound, analyst says

By Bloomberg News

Nov 9, 2018 @ 11:43 am EST

Traders work on the floor of the New York Stock Exchange (NYSE) in New York. Photographer: Michael Nagle/Bloomberg
Traders work on the floor of the New York Stock Exchange (NYSE) in New York. Photographer: Michael Nagle/Bloomberg Photographer: Michael Nagle/Bloo

If U.S. stocks want to reclaim their September highs, buybacks might have to carry the load.

Strategists including JPMorgan Chase & Co's Marko Kolanovic have championed the idea that an increasing corporate bid for U.S. equities will buoy returns through the end of the year, an idea that has been bolstered by news of big repurchase announcements from the likes of IBM Corp.

Brian Reynolds, asset class strategist at Canaccord Genuity, goes further. Right now, buybacks look like the only game in town when it comes to sustaining this rebound, he wrote in a note Thursday.

The analyst points to weakness in the Smart Money Flow Index, which attempts to gauge stock flows at the tail end of the trading day, thought to be from large sophisticated buyers. This index fell harder than the broad market during the recent tumult, and hasn't recovered as quickly.

"The continued bearishness of investors despite the stock price bounce indicates to us that debt-fueled buybacks are likely going to be even more important," he wrote, adding that large-cap names are likely to initially pace gains.

It's debatable just how "smart" this index really is, and some strategists have argued the ascension of exchange-traded products shows this metric more reflects passive flows.

The equity bounce so far offers mixed support for the buyback thesis. A basket of companies compiled by Goldman Sachs with a penchant for buying back a substantial amount of their own shares has outperformed the S&P 500 Index since its Oct. 29 low. However, so have small caps.

The seeming lack of appetite for stocks from big professional money managers also raises the chances that this bounce in equities is a head fake and a return to lows may be in store, he wrote.

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