VORASIOUS cash appetite among virus band companies and a battered economy that makes repurchases difficult to justify distorts the dynamics of supply and demand in the stock market, something that bulls worry about going towards the end of the year.
While US companies typically repurchase much more stock than they sell, this year has been different, as offers from everyone from Snowflake Inc. to Warner Music Group Corp flooded the stock market. Companies do the most damage during the pandemic, from airlines to cruise ships, rushing to raise money and strengthening their balance sheets.
The companies have announced plans to raise approximately $ 510 billion through initial and secondary share offerings by 2020, a 50% increase from last year, according to data compiled by EPFR, a unit for Informa Financial Intelligence. For the first time since the crisis year 2009, the amount that the companies announced that they would remove via repurchases and takeovers matches. In this context, an average of $ 3 was repurchased for every $ 1 raised over the past decade.
The company’s demand “is a component that drives the market higher that is no longer relevant” in this risky atmosphere, says Randy Frederick, Vice President of Trading and Derivatives for the Schwab Center for Financial Research. “On my own, I would not say that it causes the market to go down, but it can lead to the market leveling out and not going much higher.”
At present, of course, there are no signs that the slowdown in repurchases is hindering price gains when everyone, from hedge funds to individuals, is chasing rallies that added record $ 5 trillion to stock values in November. It is also possible that positive vaccine news will lead to a resurgence for repurchase.
But the explosion in offers is swelling in stocks of stocks, a trend that has pushed stock prices to market peaks in the past. The S&P 1500 division divider, a rough gauge for outstanding shares, has risen 0.2% this year, ready for the first increase in ten years, according to data compiled by Bloomberg.
While the rise in IPOs underscores a robust market, higher shares can also be seen as an indication that companies are “selling high”, with values that are too attractive to resist – while at the same time being too rich to justify repurchases. 500 trades near the highest multiple since the dot-com era.
“Obviously when the market is at a record high, you want to issue shares now, because the shares are worth much more than they would be if the market were refueling,” said Winston Chua, an analyst with EPFR, by phone. not corporate stock quotes. “
Despite record keeping, some companies have refrained from repurchasing shares with the pandemic again. Others, such as the largest banks, are prevented by the Federal Reserve from returning cash to shareholders. Announced repurchases have decreased by 54% to $ 390 billion this year, according to data compiled by Birinyi Associates.
“There is no incremental buyer out there, so it’s a negative, and it still signals some caution when companies let the cash accumulate,” said Mike Bailey, research director at FBB Capital Partners. “The downside is that you are building more pressure for companies to really drop the hammer and start buying back stock next year and until 2022.”
This is a scenario that Goldman Sachs Group Inc.’s strategists under the leadership of David Kostin see coming. In 2021, share repurchases will double to $ 300 billion and the share issue will fall from this year’s record high, his team estimated.
Corporate measures on equities showed a close inverse relationship to market performance. During the two decades up to 2015, companies increased the demand for equity for 15 different years, of which 12 received a S&P 500 profit, according to a study from EPFR. During the five years when corporate income increased, the stock index fell 60% of the time.
New listings on US stock exchanges have raised more than $ 150 billion this year, of which about half of the specialty companies, or SPACs, according to data compiled by Bloomberg. Airbnb Inc. only applied to sell as much as $ 2.6 billion for the rental platform and its existing investors to cover one of the busiest years ever. Other companies planning lists include food delivery service DoorDash Inc. and video game company Roblox Corp.
“In every cycle, when we say ‘OK, that’s the deal the market was rolling on,’ and suddenly everyone’s pulled into their horns, ‘” said Arthur Hogan, chief marketing strategist at National Securities Corp. “I don ‘t think we’re there yet, but really the number of deals has been quite historic,” he added. “Companies that should not come out and there is always a tipping point. – Bloomberg