The tumbling stock market is stuck in free-fall without its most important safety net
- The US stock market is plummeting once again Wednesday as global trade war tensions escalate even further.
- Unfortunately for bulls, US equities are going to have to recover without the use of a trusted strategy that's served as a safety net for the market.
If the stock market is going to recover from its ongoing free-fall, it'll have to do so without its most important buyer: companies themselves.
That's because this patch of equity weakness is occurring right smack dab in the middle of the share buyback lockup period that normally starts about five weeks before corporations release earnings. So with most reports expected later this month, those companies are left paralyzed, unable to engineer the stock appreciation afforded by buybacks.
This is a big deal - and a potentially grave situation - for the stock market. For the duration of the nine-year bull market, share repurchases have provided a crucial backstop for stock prices, even in times devoid of other positive catalysts. Without them, it could be open season for sellers, especially with investors choosing to focus on the escalating global trade war, rather than the myriad other positive market drivers.
Meanwhile, JPMorgan forecasts that companies are on pace to execute more than $800 billion in gross share buybacks in 2018, which is on pace to shatter the annual record. But they find themselves in the frustrating situation of being completely hamstrung at the worst possible time for the market.
Goldman Sachs is fully aware of this unfortunate phenomenon. In a recent report, the firm pointed out that the 10% correction that jarred US stock indexes in February also coincided with a lock-up period.
But just because the buyback freeze has markets vulnerable doesn't mean everyone is going to sit on the sidelines. In fact, during the early February chaos, non-locked-up corporations were basically the only buyers in the market and kept the damage from worsening, said Goldman.
To be sure, many companies repurchase their shares on predetermined schedules, which allows them to avoid lockup periods. This means that buybacks could theoretically drive appreciation during a turbulent period, as indicated by Goldman's conclusion above. But still, the lack of freedom to do additional discretionary buybacks is the real issue here.
Overall, even as stock market pressures mount, there are still plenty of experts forecasting a full recovery for stocks sometime in 2018. In their mind, positive fundamentals like earnings growth will eventually save the day. But as the specter of a trade war grows larger, it's going to get increasingly difficult to rationalize being a bull in this environment.