Buybacks to the Rescue?
Carl Noble CFA®, Senior Vice President of Investments | March 29, 2022,
2022 is certainly off to an inauspicious start. Spring hasn’t even fully sprung yet investors’ nerves are already frayed thanks to a hawkish Fed pivot, the highest inflation in decades, and even war. Equity volatility has surged and talk of recession has started to permeate financial media thanks to a flattening yield curve. And yet, despite all the gloom & doom, over the past couple of weeks stocks have found their footing with the S&P 500 Index rallying more than 10% off its intraday low back on February 24th. Who has bravely entered the fray to buy when so many others are selling? It’s clear that at least part of the answer lies with US corporations buying back their own stock.
Estimates from Goldman Sachs show that buyback authorizations have already surpassed $300 billion this year, which puts them on track to exceed last year’s annual record of approximately $1.2 trillion. This is largely thanks to record profits that allows companies to not only hire more workers and increase their capital expenditures but also to purchase their own shares. In some cases, these shares are very much on sale after significant corrections in certain parts of the market, making it even more enticing to execute buyback programs.
Another important factor for keeping the buyback train rolling is whether or not credit markets remain open. At the moment, they remain fully open for business – March has seen investment grade corporate bond issuance clock in at a whopping $200 billion, the fourth highest monthly total ever. Even with higher interest rates this year, CFO’s can still borrow on relatively inexpensive terms to help fund equity purchases.
Buybacks can’t prevent selloffs from happening, but with earnings estimates continuing to ratchet higher and near-record bond issuance they should remain an important source of demand that can help to dampen further bouts of volatility if they occur.
Source: Goldman Sachs, Bloomberg, as of 3/28/22
The Market History of Mid-Term Election Years Since 1950
Richard Barrett, Chief Investment Officer | March 10, 2022
2022: the year of volatility. COVID, inflation, the Fed, Russia/Ukraine, energy prices, US mid-term elections, MLB strike, Rodgers re-signs with Packers. A rather lengthy (growing?) list of worry.
One question I have been getting from clients the past two weeks goes like this: is the current level of volatility unusual for a US mid-term election year? It’s come up in 3 or 4 meetings and so if it’s on the minds of some its likely on the minds of many. The chart below captures historical equity market drawdowns in mid-term election years going back to Truman. Drawdowns in such years run about -16% on average AND one year forward returns average +33%.
Lots of volatility…and lots of forward return to match. One often precedes the other.
Source: JonesTrading LLC, LPL as of March 7, 2022
Forward returns from elevated volatility levels – follow the VIX
Richard Barrett, Chief Investment Officer | March 2, 2022
The VIX contract is the way professional, institutional traders invest/trade/hedge market volatility. A low VIX implies a low volatility world with generally good, stable equity markets. A high VIX implies a world in which volatility is spiking and equity prices are falling.
The chart below captures what historical FORWARD 12-month returns look like for the SP500 for various VIX volatility readings. Historical VIX readings between 11-21 has led to something that looks like a +10-12% forward returns for stocks. Historical readings of 21-28 have looked less stellar – someplace around a 3-5% forward return. More extreme/higher VIX readings have historically translated into higher forward equity market returns. Historical VIX readings of 29-33 have translated into average forward returns of +15% looking out one year. Very extreme historical VIX volatility readings of >33.5 have translated into forward equity market returns of +25%. History says the higher the vol, the higher the forward return.
We started this morning with the VIX at around 33. Can elevated volatility levels become more elevated? Absolutely. But knowing what the VIX means and how past markets have acted during very volatile times can help explain some of today’s many market unknowns and maybe set some expectations.
“History doesn’t repeat itself, but it often rhymes” – Mark Twain
Source: JonesTrading LLC, Schroeders as of March 1, 2022
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