VIX ‘Too Low’ As Data, Seasonal Buyback Lull Loom

Markets may lose a key pillar of support just as equities appeared to find their footing after a very rough start to 2022.

Buybacks will be robust this year, but only equate to 0.7% of market cap, near the low-end of the range over the past decade, UBS’s Stuart Kaiser said, in a recent note, cautioning that the corporate bid will decelerate as we approach Q1 earnings season.

Note that buyback authorizations are on track to top 2021’s all-time mark. Gross buybacks should reach $1 trillion this year and on net, corporate equity demand may total a record $700 billion in 2022, according to Goldman.

Read more: ‘Diamond Hands And Buybacks’ To Drive Stock Demand

But that “strong underlying bid for the market” is set for a seasonal slowdown, Kaiser wrote, noting that such periods are typically accompanied by relative underperformance in the S&P Buyback Index.

Of course, that isn’t a reason to turn overtly bearish if you were previously constructive. It’s not as if buyback blackouts are some new phenomenon. UBS was clear on that. “As a stand-alone, easing buybacks are not a reason for concern,” Kaiser wrote.

The figure (below) gives you some context for headlines touting what’s likely to be a record year for repurchases.

Again, that’s not to suggest the corporate bid won’t make a difference or somehow isn’t relevant. It will and it is. But context is always key, and because I talked about the aggregate figures over the weekend, I thought the ratio might be useful.

For UBS’s Kaiser, investors may want to at least consider that “given light positioning and buyback stocks beating the SPX by about 200bps YTD,” the waning impulse into earnings might “open space for tactical downside risk.”

Further, he cautioned that the near 9% rally off recent lows in the S&P “has put a serious dent in short-term risk pricing.” A 21 VIX is “too low given upcoming US data, ongoing headline risk and easing buybacks,” he said.