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A lot of people seem to have already forgotten about last month’s big market sell-off. But if you’re still worried about October’s market sell-off, you should know that the largest bank in the U.S., JPMorgan Chase, isn’t.
In fact, strategists at the mega-bank believe October’s market correction was driven mostly by technical factors and should reverse as earnings season progresses. Earnings season began in early October and is still ongoing.
One of the technical factors JPMorgan cites is remaining stock buyback firepower, which was missing during much of October.
Why was that?
In the period before earnings are released each quarter, companies are not allowed to purchase their own stock. It’s commonly referred to as a buyback blackout period. Last month, buybacks totaled just $12 billion by Oct. 19. It should come as no surprise that October’s sell-off came during the blackout period when many corporations couldn’t buy back their own stocks.
The sell-off also occurred during a period of multiple slowing growth forecasts, trade war escalation and the aftermath of the Fed raising rates again in September. For the market, it was a bad combination.
Sticking to buybacks, they are one of the primary reasons the stock market was setting records this year, before last month’s swoon.
In fact, corporations account for the greatest demand for U.S. stocks. The Trump tax cuts are a major reason why, as companies have used the extra cash to buy their own stocks. You can see this clearly in the market as Wall Street has deployed much of that extra cash to buy back their own stocks.
My former employer Goldman Sachs has estimated that S&P buybacks this year will exceed last year’s by 44%. And buybacks remain on pace to exceed $1 trillion this year, which is a record.
And as I revealed to my readers this past weekend, the ban on share buybacks that companies must abide by around earnings season is now over. That means U.S. firms can return to their share buyback plans.
And all that money that U.S. corporations have set aside for buybacks this year has not been all used up. UBS estimates $170 billion will become available for buybacks over the month ahead. That could be a major catalyst to push stock prices higher.
This should give a lift to the markets in November, building upon the post-election rally. It should also continue into the Thanksgiving holiday and through to the end of the year, before we get sales figures that could thwart market enthusiasm.
But buybacks also represent a problem. They boost a stock in the short term. But that higher stock price in the short may come at the expense of the long run. It’s a short-term strategy.
It means that companies are not using the money to invest in longer-term projects, factories and workers, even though that was a promised from the Trump’s major $1.5-trillion tax cut.
And amidst escalating trade wars and all the other concerns facing today’s markets, executing …read more
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