If you’re searching for a silver lining in the dense fog of uncertainty hanging over the global economy as a result of the Trump administration’s on-again, off-again tariffs, look no further than buyback authorizations.
The boilerplate narrative when it comes to the C-suite and tariffs says unprecedented trade policy uncertainty is a nightmare for management teams. If you can’t see your hand in front of your face, you can’t plan.
As I put it Monday, if visibility doesn’t improve, corporates “may decide on a ‘better safe than sorry’ approach,” canceling orders, pausing hires and nixing capex.
The figure below’s updated with readings for April and May on the category-specific index for US trade policy published as part of the widely-cited Baker, Bloom and Davis Economic Policy Uncertainty series.
The EPUs are news-based, so in addition to testifying about the epochal nature of the shift Trump’s “Liberation Day” levies appeared to presage, the enormous spike’s also a testament to Trump’s unparalleled ability to generate press coverage, good or bad.
Quibble as you will with the implication — i.e., that US trade policy’s four times as uncertain as it was during 2019 and eight times as indeterminate as it was when NAFTA was negotiated — it’s fair to say the sheer number of unanswered questions around tariffs makes this moment unique. And uniquely vexing for corporates.
But as Nomura’s Charlie McElligott pointed out, all of that uncertainty might be fueling buybacks, thereby creating an ironically bullish outcome for US equities.
On Tuesday, McElligott updated the figure above (which he also used in a note published late last month) to make the point.
“Notionally speaking, the single-most consequential flow from Trump trade policy shocks is the perverse dynamic where corporate uncertainty, perceived as a spending and investment downside catalyst, has instead led to an equities-bullish flow via massive share repurchase authorizations,” Charlie remarked.
As I always say, there’s no plunge protection quite like the corporate bid which, as McElligott went on to write, “literally shrink[s] the float while simultaneously acting as a realized vol killer, as buybacks tend to be most active into pullbacks, acting as shock absorbers when spot tries to sell off.”
Is the implication that rather than investing, companies are preferring to return cash to shareholders?
Never mind it does indeed say, a long day at the screen programming doesn’t do wonders for reading comprehension.
I don’t see buybacks occurring much in pullbacks. In fact, buybacks appear to peak at all-time-highs as management liquidates ESOs and warrant positions into a favorable tape. Then months later they just float the shares back into the market. It’s good be in the c suite.