Last weekend, I talked a bit more about equity supply/demand dynamics.
The overarching point was to say that between, on one hand, a precipitous decline in buybacks, and, on the other, IPOs and secondaries, the US equity market was poised to expand for the first time in more than a decade.
Specifically, 2020 marks the first time since 2009 that the S&P 1500’s divisor is up for the year, on Bloomberg’s data.
All else equal, more supply and less corporate demand in the form of buybacks “should” have been bearish. After all, corporates have been the largest source of US equity demand for years.
But, this ostensible headwind was insufficient to impede equities on the road to new highs. And those new highs simply emboldened more equity issuance. Airbnb’s ridiculous first day performance this week was indicative of the mood.
As over the top (figuratively and literally) as things may seem right now, it’s worth at least considering that if buyback activity picks up in 2021, that’s just an extra source of demand.
If things are already going well, it’ll be another bullish catalyst — “a cherry on top,” so to speak. If, for whatever reason, things aren’t going well, the return of buyback “plunge protection” would help limit the downside, (with the caveat that the factors which might derail markets in 2021 would likely also make the C-suite reluctant to part with cash).
“Buybacks continue to be constrained mostly by Financials as well as by Cyclicals,” JPMorgan wrote, in their year-ahead outlook for equities. “Based on Q3’s annualized figure, US corporates repurchased shares at an annual rate of ~$350 billion, which is down from 2019’s rate of ~$630 billion,” the bank went on to say, adding that they “expect S&P 500 companies to increase net buybacks next year to an annual pace of ~$450 billion.”
Goldman is somewhat cautious. “After representing the largest source of demand for US equities for a decade, corporate buybacks will likely remain depressed next year relative to recent history,” the bank said last month.
They see net demand from corporates doubling from $150 billion in 2020 to $300 billion in 2021. That figure was $568 billion in 2019 and $692 billion in 2018, following the tax cuts.
In a note dated Thursday, BofA’s Michael Hartnett underscored the anomalous nature (by comparison to recent history, anyway) of 2020. This is “the first year since 2009 that US IPO and secondary issuance is higher than S&P 500 buybacks,” he wrote.
Just another in the long list of notable statistics from what might fairly be described as one of the most remarkable years that most living humans have ever witnessed.