To The Moon

Do you think this is a Bullish Signal for Q4 2022?

Corporations are already on pace to repurchase $1.1 trillion of U.S. stock this year, which will go down as the most ever in the history of the stock market.

John Flood, a trader at Goldman Sachs, said in a note,

“Last week was a VERY active week on our buyback desk despite still being in blackout period,”

Companies are trying to take advantage of lower valuations amid 2022′s sell-off.

Publicly traded companies have a policy that restricts trading in their own shares beginning two weeks prior to the quarter end, through 48 hours after earnings are publicly released. Most of the current buybacks are executed through Rule 10b5-1, which allows companies to set up a predetermined plan to buy back stock.

According to data compiled by Birinyi Associates:Ten months into 2022, American firms have announced repurchases totaling $1 trillion, up 8% from a year ago and on course for an annual record, Jeff Rubin, director of research at Birinyi Associates saie:

“While the stock market has traded meaningfully lower, companies remain on sound footing, Actions speak louder than words. While CEOs say they are concerned about inflation, a possible recession, and rising interesting rates, they are not hoarding cash and instead see value in their shares.”

At the current pace, the planned share repurchases would amount to $1.25 trillion, breaking an annual record for a second straight year, Birinyi’s data show.

By contrast, during the pandemic in 2020, intended buybacks tumbled more than 40% from the prior year. At the height of the 2008 financial crisis, repurchases plunged almost 60%.

For investors, the steady demand underpinned by repurchases is one of the few upward forces left in the market. It also highlights a risk: betting against stocks at a time when earnings season kicks into full gear and companies emerge from what is generally assumed to be a blackout period for buybacks.

Repurchases tend to keep equity losses from snowballing. The $S&P 500(.SPX)$ Buyback Index, tracking the top 100 stocks with highest repurchases, is outperforming the broader benchmark by roughly 5 percentage points this year.

Shares with highest buybacks have outperformed the $S&P 500(.SPX)$ in 2022.

Companies have at times acted as a source of support during this year’s selloff. In June, for instance, when hedge funds were furiously selling stocks, Goldman Sachs Group Inc.’s unit that executes share buybacks for clients saw volume spiking to what was then the highest level of 2022.

“The length and magnitude of any rally may be dependent on what we get from the Fed on Nov. 2 and the CPI print on Nov. 10,” the firm’s team including Andrew Tyler wrote in a note. “That said, be cognizant of CTA activity kicking in as we move higher as well as an increase in buyback activity.”

Note:

Buybacks have been a popular way for companies to return cash to shareholders, competing with dividends. Corporate America also uses share repurchases to improve earnings per share, since buybacks reduce the share count.

Repurchases took a hit during the depth of the pandemic as companies focused on conserving cash, cutting costs and managing liquidity risk stemming from the crisis.