It may come as a surprise to some that despite a dramatic drop in the amount of announced buybacks which as we noted recently have slumped to the lowest level in more than two years...
... the notional amount of executed buybacks - those which have been announced previously but had yet to be effected - actually continued to surge and just a little over a month into 2020 is already almost a third higher than the comparable period a year ago.
That's the observation from one of the largest buyback execution desks in the US: that of Bank of America, which today reports that "buybacks by corporate clients accelerated and year-to-date are tracking 27% above last year's levels at this time." One can see the relentless grind higher in buybacks since late 2017 when Trump's tax law allowed companies to repatriate trillions in funds previously held offshore and use them to buyback stock.
The 4-week trailing correlation between BofA client corporate buybacks and the total quarterly buybacks effected by S&P500 companies is shown below.
Looking at the chart above suggests that if indeed executed buybacks are almost 30% higher than a year ago then 2020 is shaping up as another record year for S&P-supporting buybacks, as companies catch up to the total buyback levels already announced and granted in recent years. It also means that the true buyer of stock in every market downturn remains the same one: corporations themselves, which thanks to their price-indiscriminate purchases step in during even the most modest selloff, and without regard for execution price (all they care about is higher stock prices to trigger management option levels) they proceed to buy, offsetting any selling from other investor classes.
Just what is the impact of buybacks on clearing prices? This is a topic we covered back in December, when citing SocGen, we said that "the lack of market liquidity, as measured by S&P 500 turnover – the ratio of trading volume vs free float market capitalization – has exacerbated the impact of share repurchases on US equities." And with the bulk of market liquidity focused in just a handful of stocks, it is no surprise why even a modest amount of price-indiscriminate buybacks can levitate the bulk of the non-FAAMG market.
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Besides the surge in buybacks, BofA made some other observations on who is buying:
- BofA clients were net buyers of US equities (in the amount of $2.2bn) for the fourth consecutive week, buying both single stocks and ETFs.
- Net buying was driven by institutional clients (who bought equities for the first time since late Dec.), while private clients and hedge funds were net sellers for the first time in four and three weeks, respectively.
A more detailed look reveals the following:
BofA clients bought stocks in five of the 11 sectors last week, led by Materials (record inflows) and Communication Services. Consumer Discretionary and Industrials stocks saw the biggest net sales (with near-record sales of the former). Based on less-volatile rolling four-week average flows, Consumer Discretionary - which previously had seen inflows since early Dec. on this basis (longest of any sector) - has now seen flows turn negative amid concerns over the coronavirus.
Positioning has also shifted: long only funds' relative weight in the sector has fallen to post-crisis lows, and hedge funds have also cut exposure.
In aggregate, cyclical sectors saw bigger inflows than defensives last week.
Perhaps most surprising is that despite the mauling in value stocks, BofA said that its clients "are buying the dip in Energy: the sector has seen inflows every week this year."
Yet all of the above was lost in the noise of the thunderous flood of passive investing, which saw another record inflow in Growth ETFs which have sent the Big 4 tech names soaring, which as we noted earlier, are responsible for two-thirds of the overall market's gains in 2020"
Clients returned to buying equity ETFs last week, and continued to buy fixed income and commodity ETFs.
Clients bought ETFs across all sectors except Financials, Industrials and Real Estate. Over the past few months, a 4-week rolling average reveals net buying in ETFs since mid Sep 2019; Energy since early Jan. 2020; Financials since early Nov. 2019; Real Estate since early Jan. 2020; Comm. Svcs., Materials and Tech since late Jan. 2020...
... meanwhile defensive sector ETFs (Utilities/Health Care/Staples) saw the largest inflows.
Notable changes in trends: Consumer Discretionary and Utilities saw a reversal to net selling after net buying since early Dec. 2019 and late Dec. 2019, respectively; Industrials also saw a reversal to net selling after a brief period of buying.
By style, buying was in both Blend and Growth ETFs, while clients sold Value ETFs for the fifth consecutive week. Value ETF outflows have looked to be at capitulation levels (rolling four-week average hit a record high last week), and have lessened since then. Meanwhile, four-week average inflows into Growth ETFs are now at record highs.