There likely will be economic data reports ahead worse than anything the U.S. has ever seen, but they could change course quickly.
It might be premature to declare the bear market dead, but Thursday’s action sure checked off some important boxes.
Conventional Wall Street wisdom is that bear markets, or 20% declines from 52-week highs, die on bad news, and Thursday featured some of the worst the U.S. economy has ever seen.
Nearly 3.3 million Americans filed initial jobless claims for the week ended March 21, marking the worst week ever, by far. The second-worst number came during the 1982 recession, and the report released Thursday more than quadrupled that total.
Yet the market rose, violently so, at one point hitting 20% off the recent lows, which would define a bull market. That came just days after the longest bull market in history took the quickest fall into bear territory ever.
The thinking about bear markets dying on bad news is that the market is always looking ahead, and when it fully prices in all of the awful stuff out there, the selling will stop even if current conditions look bleak.
There wasn’t much sense to be made of the move Thursday, but it did spark talk that the worst of the market damage from the coronavirus crisis could be over.
“The markets and the economy don’t run in parallel. The market’s running way ahead of the economy,” said Randy Frederick, vice president of trading and derivatives at Charles Schwab. “The markets don’t care about what’s happening today, the market cares about what’s happening six months from now.”
If that’s true, then it makes some sense that the market, as measured by the Dow Jones Industrial Average, is rallying after falling some 37% from its historic peak set in February.
‘Indiscriminate selling’ is over
Economists are expecting a steep fall for the economy in the second quarter that could exceed a 20% GDP decline, with some 10 million people out of work and an unemployment rate higher than anything the U.S. has ever seen.
The jobless claims data offered the first test of whether investors would be willing to look through the bad readings and continue buying. There was some speculation that one of the reasons for the rally Thursday was that the number, while much higher than the 1.5 million consensus, wasn’t as bad as some forecasts of up to 4 million.
For a bottom to start forming “we’ll need to see investors using that term, that it’s less bad,” said Quincy Krosby, chief market strategist at Prudential Financial. “That’s typically what you wait for to begin to invest in earnest instead of just trading.”
Krosby said that market action before the claims report had been encouraging as Wall Street saw massive rallies Tuesday and Wednesday as well.
“The indiscriminate selling that you saw in order to raise money has eased, and that also matters,” she said.
A bottom, but maybe not the bottom
While the data is likely to continue to be bad for a couple of months, a pronounced recovery is expected to follow. Federal Reserve Chairman Jerome Powell told NBC’s “TODAY” show Thursday that he sees a “good rebound” in subsequent quarters and pledged the central bank will to whatever it can to ensure that the recovery “is as vigorous as possible.”
That kind of talk is raising hopes in the market.
“I think the market has reached a bottom,” Peter Boockvar, chief investment officer at Bleakley Advisory Group, told CNBC’s “Power Lunch,” though using a long “a” in describing the situation.
“I think all the bad news we’re going to hear about the virus over the next four to six weeks, all the terrible economic data we’re going to see over the next four to six months, that has been priced in,” he added. “The next question for the market is what happens after … we get to the fall and the economy starts to recover? Is it a ‘V’ bottom recovery, or is it something that’s going to take a lot more time? Unfortunately, I’m in the latter camp.”
At that time, Boockvar said, investors have to be reevaluate how much they’re willing to pay for stocks. Will it be the 19 times earnings they were paying just before the market collapsed, or will it be a lesser multiple?
Of course, by then conditions will have changed considerably.
In addition to seeing, hopefully, a coronavirus under control, there will be stimulus in the system unlike anything the world has ever seen.
The Fed has cut short-term borrowing rates to zero and instituted a slew of liquidity infusions that has been valued as high as $6 trillion. On top of that, Congress is on the cusp of passing its own measure valued at more than $2 trillion.
“We’ve got a blank check in the form of monetary policy from the Fed. We’ve not got a blank check, but the largest check ever written by Congress on the fiscal side. The third side is really the medical progress,” Schwab’s Frederick said. “It takes all three of these approaches to solve it. Only two do we have control over. The third is controlled by the calendar and Mother Nature. That’s the tough part.”
Asia’s Companies Splurge on Buybacks as Western Firms Shun Them
27 March 2020
Asian tycoons are gung-ho on share buybacks at a time when industry leaders in the U.S. and Europe are holding back because of the coronavirus outbreak.
Masayoshi Son’s Softbank Group Corp. has pledged 2 trillion yen ($18 billion) to buy back shares. Indian billionaire Dilip Shanghvi’s Sun Pharmaceutical Industries Ltd. has committed 17 billion rupees ($225 million) to repurchase stock.
The two are not alone. A gamut of companies across Asia have recently either bought back their shares or announced fresh buybacks in the belief that their stock has become undervalued amid a market rout that has evoked painful memories of the global financial crisis.
“Those doing buybacks are signaling they have healthy balance sheets and are confident enough to weather this downturn,” said Joel Ng, an analyst at KGI Securities (Singapore) Pte. Asian companies are “seeing value in their current share prices,” he added. According to Ng, many Asian companies are in a much stronger financial position than their peers abroad. While many U.S. and European companies had been accumulating debt, “Asian companies have been deleveraging and building up their cash war chests,” he said.
S&P Dow Jones Indices expects that S&P 500 buybacks this year may be significantly lower than the pre-virus estimates that projected this year’s purchases to come close to or to top the $806 billion record set in 2018.
The list of U.S. companies that have suspended buyback programs includes AT&T Inc., Chevron Corp. and Intel Corp. In Europe, buybacks were put on hold at Credit Suisse Group AG, Royal Dutch Shell Plc, Eni SpA and Total SA.
While a commitment to buy back shares during economic turmoil has its risks, more Asian companies may follow the example of SoftBank, which could be biggest contributor to the region’s repurchasing tally this quarter.
“Asia has a lot of founder-driven companies, which will continue to buy stocks on excessive falls,” said Aneesh Srivastava, chief investment officer at Star Health and Allied Insurance Co. “The companies are their own babies.”
With Stocks Buybacks Halted, We’ll See How Much They Matter
Political sentiment in the U.S. has turned so viciously against share buybacks that they may never recover. Some worry stock returns will follow suit. But wagering on the death of American equities has usually been a sucker’s bet.
Always controversial, the sight of companies blowing precious cash on their own shares has become impossible to stand at a time when the coronavirus pandemic is spurring layoffs and raising bankruptcy risk. A lasting death knell may have sounded last week, when President Trump said he didn’t like it when proceeds of his 2017 tax cut were spent this way. Now Congress’s $2 trillion stimulus proposes barring any company receiving a government loan from repurchases until a year after it’s repaid.
It’s a watershed moment for buybacks, a tactic that—while done everywhere—has its fullest expression in American stocks, says Stephen Dover, head of equities at Franklin Templeton. Buybacks by U.S. companies represented 70% of cash returned to shareholders in the 12 months ended June 2019, according to Morgan Stanley. In Europe, where companies ladled out about $100 billion, they accounted for roughly 30%.
The S&P 500’s record of world-beating gains could be the first casualty, Dover says. “Probably going forward there will be regulation, or there will be limits to how much companies can do buybacks and pay dividends, and that will affect how much the market appreciates,” he says. “It could put the United States market on a more even playing field with overseas markets, where buybacks are less prevalent.”
Few topics in the market are this contentious. The impact of buybacks on everything from share prices and per-share earnings to the fabric of society are spiritedly debated, with easy answers elusive. On one side are claims that share repurchases brought a huge chunk of gains during the bull market, juicing executive compensation in lieu of investments elsewhere. Opponents say the impact is overstated; using cash to repurchase shares is just a value-neutral exchange of assets from one set of pockets to another, with little ability to increase overall wealth. Moreover, too few shares are bought to affect a market where $90 trillion of stock can trade in a year.
Which version is true has big implications, should buybacks go extinct. Goldman Sachs Group Inc. estimates $700 billion of shares were acquired in 2019 by U.S. companies, making them the biggest net buyer of equities.
A major salvo in the war over repurchases came in a 2017 paper by AQR Capital Management. It found no reason to assume buybacks drove the bull market. Evidence that they result in companies investing less in their businesses is scant, and because they’re often financed by debt, repurchases didn’t use up capital, said the authors, who include billionaire hedge fund manager Cliff Asness. The paper cited academic evidence showing that the announcement of a repurchase drives the associated stock up 1% or 2% on average—not an enormous effect, and one that may be explained in part by the vote of confidence in the company’s future that a buyback signals.
“There’s so many things that go into supply and demand for stocks, and what makes stocks attractive for investors, that viewing buybacks in isolation would miss a lot of the intrinsic value,” says Ed Clissold, chief U.S. strategist at Ned Davis Research. Eliminating buybacks “would make a difference. It would decrease demand for stocks. But if companies are growing earnings and are attractively valued, then there should be plenty demand for stocks.”
Companies with higher buyback yields—that is, those that return more money to shareholders via buybacks—typically perform in line with the market and trail it during times of turbulence, according to Maneesh Deshpande, head of U.S. equity and global equity derivatives strategies at Barclays. “Returning cash to shareholders aggressively makes a company riskier, hence the market rationally does not reward them with higher price performance,” Deshpande wrote in a note to clients. “During downturns these stocks underperform, and this has been starkly true during the current crises.”
Another knock on buybacks holds that they’re a way of manufacturing earnings per share growth by reducing outstanding stock, the denominator in the equation. This view also has dissenters. Ed Yardeni, founder of Yardeni Research Inc., has found evidence that companies hand out so much equity to employees that even with millions of shares bought back, any effect is almost canceled out.
One more criticism of buybacks—and one explanation for their rise—is that they’re a way of obscuring high levels of stock-based compensation to executives. There’s even evidence that some executives use short-term price bumps following buyback announcements to cash in their shares.
Many companies, unsure of how the pandemic will hit their bottom line, have suspended buyback programs, including Chevron, Intel, and Target. But even before the crisis, appetites had been waning for four years, excluding the tax-cut-fueled surge in 2018, according to Vincent Deluard, global macro strategist at INTL FCStone. Completed repurchases in the fourth quarter, the last before the coronavirus outbreak, had dropped by 15% year over year, Deluard wrote in a report.
The reason? Buybacks were looking too expensive. “The buyback era was already coming to an end,” he wrote. “Stretched balance sheets, absurdly high valuations, and nonexistent earnings growth were already good reasons not to repurchase stocks last year.”
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