We’ve written about the three big non-profit players in the stock market that are helping to contribute to an overshoot in prices today and will likely force an undershoot during the next major downturn. See the December 2014 issue of Global Investment Strategy (subscription required) for an example. The corporate sector, via share buybacks is one of the non-profit players (High frequency traders and hot money index-based ETF investors are the others).
Zerohedge has a nice post up summarizing a Goldman research piece on the impact of corporate buybacks. There is a blackout window for buybacks that starts about five weeks prior to an earnings announcement and ends a day or two after the earnings announcement. During its blackout window, a company cannot make discretionary purchases of its own shares.
Goldman finds that the S&P 500 performs worse during the earnings blackout window than in periods when companies are not restricted from repurchasing shares.
When did the blackout window start for the first quarter earnings season? A majority of S&P 500 companies entered their blackout window last week and almost 90% of firms that makeup the index will be in their blackout window by Monday.
Can the choppiness in stock prices over the last week and a half be attributed to the earnings blackout window? Correlation is not causation, but when one of the major non-profit investors in the stock market steps away, prices can hit turbulence.
The good news? By mid-April, companies will again be able to prop up their stock prices if the pesky profit motivated players in the market try to drive their company’s shares lower.