HUGE appetite for cash among virus-affected companies and a shattered economy that makes it difficult to justify buyouts are distorting the dynamics of supply and demand in the stock market, raising fears of the bulls before the end of the year.
While US companies tend to buy back much more stock than they sell, this year has been a different year as everyone’s offers from Snowflake Inc. after Warner Music Group Corp., flooded the market with equities. The companies most affected by the pandemic, from airlines to cruise lines, are in a hurry to raise cash and bolster their balance sheets.
The companies announced plans to raise around $ 510 billion in first and secondary equity offerings in 2020, 50% more than last year, according to data collected by EPFR, an Informa Financial Intelligence unit. For the first time since crisis 2009, this corresponds to the amount that companies announced they would remove through repurchases and acquisitions. In context, an average of $ 3 was bought back for every dollar raised in the last decade.
Corporate demand “is one of the elements that drives the market upward, which is no longer relevant” in this risk atmosphere, said Randy Frederick, vice president, Trade and Derivatives, Schwab Center for Financial Research. “On my own, I would not say that it causes the market to decline, but it can cause the market to flatten and not to grow very much.”
So far, of course, there is no indication that the slowdown in buy-backs is hampering price increases as everyone, from hedge funds to retail investors, is chasing the gains that pushed stocks a record $ 5 trillion in November. It’s also possible that positive news about vaccines will trigger a redemption reawakening.
However, the explosion in bids is adding to the pool of stocks, which in the past has put pressure on stock prices at market peaks. The S&P 1500 divider, a rough measure of outstanding stocks, rose 0.2% this year, marking the first increase in 10 years, according to Bloomberg data.
While the IPO boom highlights a strong market, higher stock numbers can also be seen as an indication that companies are “selling high” and that valuations are too attractive to resist – yet too rich to justify a buyback. 500 transactions close to the highest multiple since dot-com.
“Of course, when the market is at its all-time high, you want to issue stocks now because the stocks are worth much more than they would be if the market were a tank,” said Winston Chua, an analyst at EPFR. “Looking at the market in general, companies do not support stock prices.”
Despite record cash amassing, some companies are avoiding share buyouts as the pandemic is rising again. Others, like the biggest banks, cannot return cash to their shareholders through the Federal Reserve. According to data compiled by Birinyi Associates, announced buyouts fell 54% this year to $ 390 billion.
“There is no growing buyer, so this is negative and still signals some caution as companies allow cash to accumulate,” said Mike Bailey, research director at FBB Capital Partners. “On the other hand, you’re building more pressure on companies to really throw the hammer and start buying back stocks next year and by 2022. “
Such a scenario predicts that strategists at Goldman Sachs Group Inc. under the leadership of David Kostin. In 2021, net stock buyouts will double to $ 300 billion and share issuance will drop from this year’s high, his team predicts.
Corporates in equities showed a strict inverse relationship to market performance. An EPFR study found that over the two decades to 2015, companies increased their net stock demand in 15 different years, 12 of which saw an increase in the S&P 500 index. In the five years that corporate supply increased, the stock benchmark fell in 60 % of cases.
New quotes on the US stock markets brought in more than $ 150 billion this year, roughly half of which was made by special purpose vehicles or SPAC, according to data compiled by Bloomberg. Airbnb Inc. He has just applied to sell $ 2.6 billion to the home rental platform and its current investors to end one of the busiest years in history. Other companies planning deals include food supplier DoorDash Inc. and video game company Roblox Corp.
“Every cycle when we say,” Okay, that was a deal the market turned around, “and suddenly they’re all pulled into their corners, said Arthur Hogan, chief market strategist at the National Securities Corp. “I don’t think we’re still there, but the number of deals is certainly quite historic,” he added. “Companies that shouldn’t go out are going out, and there’s always a turning point. – Bloomberg