Beyond earnings, buybacks to give market support

The equities selloff had its climax on Wednesday afternoon when the S&P 500 set its low for the week as concern over the globaleconomy, conflicting views on the timing of the next policy move by the Federal Reserve, and headlines about the Ebola virus made investors even more skittish.

One factor that could have accelerated the decline was that many U.S. companies were out of the corporate repurchase market as they headed into earnings season.

“We are now in a blackout period so companies have been precluded from conducting tactical buyback activity that has supported the equity market during sell-offs in the recent past,” said Goldman Sachs in a note earlier this week.

October has been particularly quiet for buybacks by U.S. companies, with about $1.7 billion in stock repurchases announced or completed so far this month, compared with about $250 billion during the first nine months of the year, according to Thomson Reuters data.

The recent market decline could give many companies the opportunity to buy back stock at bargain prices. On Thursday, 605 New York Stock Exchange issues hit 52-week lows, the most for a single day in three years, while just 21 hit 52-week highs. The number of lows fell to 153 on Friday.

“If you truly believe your prospects are bright and you’d like to return capital to long term holders of your stock, it is an excellent time to buy back shares,” said Kim Forrest, senior equity research analyst at Fort Pitt Capital Group in Pittsburgh.

“It would seem stupid to let this opportunity pass.”

November buybacks would by no means be a novelty. Goldman Sachs data show that, in the last seven years excluding 2008, November accounted for about 14 percent of the yearly buyback activity, the most for any month. About 8 percent of buybacks happened in October during that period and 10 percent in December.

The market is entering the busiest part of earnings season, with results due from 128 S&P 500 companies, including six Dow components.

“Next week is one of the busiest we have, so that unlocks a lot of buyback programs after that’s over,” said Art Hogan, chief market strategist at Wunderlich Securities in New York.

He said the impact of those post-earnings buybacks has been consistent in the past years as “companies have been buying stock pretty aggressively.”

If buying ahead of what could be a good opportunity for companies themselves to purchase their stock is not a good enough reason, fundamentals are also on the bulls’ side.

Earnings for the S&P 500 are now forecast to have risen 6.9 percent in the third quarter, up from last Friday’s 6.5 percent estimate, while sales growth for the quarter is estimated at 3.8 percent, Thomson Reuters data showed.-REUTERS