(Blog inspired by Datadash’s video)
Stock Buybacks have played a major role on propping up the valuation of US equities. A Stock buyback occurs when a company buys back its own shares from the market in order to create an artificial sense of demand and increase the stock’s price. This past year alone companies have contributed over a trillion dollars’ worth of stock buybacks with a lot of the money used for purchasing buybacks being leveraged.
So what is a Buyback Blackout? A Buyback Blackout has to do with earnings reports. Under US regulations, a company cannot buyback any of its shares a month before its quarterly earnings report. A period where this regulation limits a lot of big companies to buyback their own shares is also known as a Buyback Blackout.
Seeing that 86% of the S&P500 will not be able to participate in buybacks starting October 5th, this leads to one of the biggest Buyback Blackouts of the year. Buybacks have become a massive part of what keeps up markets at this point and with a majority of companies unable to purchase buybacks in October, the lack of demand could drive markets downward.
In the past, Blackout periods have spiked up volatility and brought equity prices lower. Many of the companies participating in stock buybacks are driving up demand to cover for institutions selling their shares in companies. Hedge funds have been depleting their exposure to US equities since February.
Looking into October it will be interesting whether this Blackout period will have significant effects on US markets. The VIX (volatility index) could see a rise as companies are not able to control their stock prices with buybacks. Whatever happens, whether markets go to new lows or new highs, will be interesting to watch.