Corporate share buybacks were a shock absorber in April’s sell-off

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It’s easy to be cynical about share buybacks, which is why we often are.

Regular readers should know the debate by now. Buybacks can lower a company’s cost of capital and might be read as a signal of discipline around spending, but just as often they expose management’s poor grasp of fair value while triggering selling by passive investors. Mechanical increases to earnings per share shouldn’t change a company’s fundamental valuation, but they can be useful for hitting bonus targets that print nearly as much new stock as was repurchased. Blah blah blah blah blah.

Anyway, here’s a chart:

April was an absolute monster for corporate share repurchases. Per JPMorgan data, the S&P 500’s first-week plunge and subsequent recovery had US companies buying back stock at the fastest pace in years.

“The strength of buybacks in April [is] demonstrating once again the rather contrarian nature of corporate buying which tends to increase after an equity correction, thus acting as a backstop,” JPMorgan strategist Nikolaos Panigirtzoglou tells clients.

And, sure enough, similar patterns are apparent through the Ukraine inflation scare in early 2022 and the SVB crisis in the first quarter of 2023:

Buying the dip isn’t necessarily a bad strategy, whatever management’s motivation. The volatility insiders try to exploit is no help for IPO planning, however. Global issuance has remained weak since the end of 2021 and is unlikely to recover any time soon, so the recent high volume of buybacks mean we’re on track for a fourth straight year of equity markets shrinkage:

The result is more investor money chasing fewer shares in issue, squeezing up valuation metrics and whatnot. JPMorgan data shows that since the end of 2021, as global equity markets shrunk, net equity inflows totalled approximately $1.3tn:

Buying equities for their increasing scarcity is an overly crude strategy when applied to individual companies, but in times like these it probably makes some sense when applied to markets as a whole. Ergo, buybacks make stocks go up. Debate over. We’re glad that’s settled.