The stock market's most important safety net is in danger

safety net

  • US corporations repurchased stock at the slowest pace in 18 months in the second quarter, signaling a key safety net of the 10-year equity bull market could be fading.
  • Stock buybacks by S&P 500 firms totaled about $166 billion for the second quarter, down from $206 billion the period before.
  • Share repurchases have help drive share gains during periods devoid of other positive market catalysts.
  • President Trump's corporate tax cut was widely seen an accelerant for buybacks, but the slowing pace suggests its impact could be dwindling.
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The 10-year equity bull market's most important safety net appears to be in jeopardy.

Companies in the S&P 500 bought back close to $166 billion of shares in the second quarter, down from $206 billion the prior period and $191 billion for the same quarter last year, according to data from S&P Dow Jones Indices. It also marked the slowest pace of repurchases in 18 months.Advertisement

Buybacks have helped keep the decade-long bull market afloat during times devoid of other positive drivers for share gains. When public corporations conduct buybacks, it reduces the number of shares outstanding, lifting the value of each remaining unit.

"Some of the decline is due to specific M&A work, however, the declines remain prevalent," Howard Silverblatt, a senior index analysts at S&P Dow Jones Indices said in an email. "Q3,'19 will be critical to see where companies support their buyback levels.

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The GOP tax plan that went into effect in early 2018 has been widely seen as a catalyst for buybacks, as large corporations became flush with extra cash. They were seen using that either for corporate reinvestment or the return of capital to shareholders.

Buybacks hit record highs in all four quarters of 2018 following the tax cut. But the slowing pace of buybacks suggest its impact is subsiding. It now appears corporations are pulling back to keep more cash on hand amid the consistent uncertainty around the US-China trade war, and the growing signs of a global economic slowdown. Corporate investment has also softened as companies remain unsure how to proceed in the new geopolitical climate. Advertisement

The S&P 500 climbed 4% in the second quarter, and the index is up roughly 16% year-to-date.

S&P 500