If Buybacks Are Slowing, Who Will Fill The Void?
So goes buybacks, so goes the market? We may soon find out if Goldman Sachs is correct. Share buybacks have undoubtedly helped fuel the stock market to their current levels, just below the highest level ever, over the last decade. Publicly traded corporations have spent hundreds of billions of dollars annually, even by issuing debt, to repurchase their shares. Now Goldman is warning clients that buybacks are "plummeting" and it may have negative ramifications for the broader market.
Goldman found second quarter S&P 500 buybacks totaled $161 billion, which represents a decline of 18% from the first quarter. They don't anticipate the slowdown in buybacks to reverse, saying "early indications suggest second quarter weakness in buybacks may persist."
For 2019, Goldman now predicts buybacks will fall by 15%, with 2020 seeing a 5% decline. This follows last year's record $806.4 billion spent on buybacks, which represented an increase of 55% from 2017 and was more than 36% higher than the previous record in 2007.
Goldman believes spending cuts due to "growing global uncertainty" are the reason companies are taking a step back from buybacks. In another "worst since 2009," Goldman said "During full-year 2019, we expect S&P 500 cash spending will decline by 6%, the sharpest annual decline since 2009."
David Kostin, chief U.S. equity strategist at Goldman Sachs, said "Companies spend less cash when policy uncertainty is high. During August, global economic policy uncertainty registered the highest level in at least 20 years. Historically, growth in aggregate S&P 500 cash spending has been weaker during periods of high policy uncertainty. The combination of an ongoing trade conflict and next year’s U.S. presidential election will likely result in lingering uncertainty."
Buybacks have also become a contentious political topic as of late. Democratic Presidential candidate Elizabeth Warren said "These buybacks were treated as stock manipulation for decades because that is exactly what they are. The SEC needs to recognize that." Her opponent, Bernie Sanders, who wants to ban buybacks, even fought with Goldman's former CEO Lloyd Blankfein about the subject on Twitter. It's not only Democrats who are criticizing buybacks, with Marco Rubio going on a Twitter rant earlier this year saying they should be taxed like dividends.
With stocks near record highs, politicians targeting buybacks and global risks becoming more prevalent, it's not surprising companies are easing up on buybacks more than ten years into this bull market. The only question is if buybacks do continue to slow, will there be a buyer to replace corporations and if not, how far will the market fall?
They may stop at the hardware store on their way home to get pitchforks. WeWork is set to lay off 4,000 employees, or nearly 30% of its global workforce, as the company's demise following its botched IPO accelerates. These employees, who were expecting a big payday with the IPO, are now left without a job. Adam Neumann, the co-founder and former CEO, is pocketing nearly $1.7 billion as part of the Softbank bailout. Naturally, the employees are livid seeing him walk away with what equates to about $425,000 per employee that will be laid off.
Maybe just buy an index ETF and don't bother. Is stock-picking dead? For the majority of active fund managers, the answer might as well be yes. Last year, the majority of large-cap funds underperformed the S&P 500 for the ninth-consecutive year. The results only get worse the further back you look. On a 10-year trailing basis, 85% of large cap funds underperformed the S&P 500, with nearly 92% underperforming the index on a 15-year trailing basis. Despite everyone on finance Twitter seemingly never losing money trading stocks, last year was the fourth-worst year for stock managers since 2001 according to the report by S&P Dow Jones Indices.
It's not just Facebook. New York Attorney General Letitia James’ Office is also going after oil giant Exxon Mobil. Her office wants the company to pay investors between $476 million and $1.6 billion in restitution for allegedly not disclosing the financial costs of climate change to investors. The suit alleges Exxon didn't disclose the effects climate change would have on its oil holdings, such as saying assets could be "stranded," or worthless. AG lawyer Kevin Wallace said "We are not telling Exxon how to run its business, it was and always is free to change its business practices. But it has to be honest with investors."
Wall Street would love to get their hands on this. Google claims it has made a breakthrough in quantum computing by completing a calculation in 200 seconds that would take the world's fastest supercomputer 10,000 years. The Google researchers wrote in their findings "Quantum speedup is achievable in a real-world system and is not precluded by any hidden physical laws," the researchers wrote. IBM isn't buying it though. They suggest Google is underestimating the modern supercomputer, in this case IBM's very own "Summit," and therefore the "threshold has not been met."
Looking to start a new business? The World Bank released its annual "Doing Business" report last night with New Zealand taking the top spot for the fourth-consecutive year. The report, now in its 17th year, measures "the regulations that enhance business activity and those that constrain it." Out of the 190 countries measured between May 2018 and May 2019, 115 of them made it easier to do business while 26 became less business-friendly. Countries in the Gulf region saw the largest upward move in the rankings while countries in Latin America and Sub-Saharan Africa lagged. World Bank President David Malpass said "Removing barriers facing entrepreneurs generates better jobs, more tax revenues, and higher incomes, all of which are necessary to reduce poverty and raise living standards."