With over 80% of S&P 500 (SPX) companies about to enter a buyback blackout period, the remainder of April could endure a bump in stock market volatility. While these blackouts, which restrict companies from repurchasing their own shares, are a standard practice during earnings season, their combined effect on a large portion of the market can create temporary turbulence. Investors should understand that the volatility may be a short-lived phase.
Price Pressure Looms in Corporate Blackout
So far in 2024, stock valuations have received a boost from significant company-led stock buybacks. A lack of corporate buyback support until early May could depress prices. This possible downdraft would occur because buybacks fundamentally expand demand for a company’s stock, pushing the price up. With this demand temporarily sidelined during the blackout period, some downward pressure on prices can be expected.
During periods of market weakness, the decline is usually amplified. With growing concerns surrounding high interest rates, analysts are already predicting a potentially weak period for the S&P 500. As for investor reaction, some investors may look for weakness and view it as a buying opportunity. Others may ride it out, or even allocate a higher percentage to cash.
Stocks That Are Most Impacted
Investors should expect increased volatility in lower-volume stocks, which typically belong to small-cap and mid-cap companies. Lower-volume stocks refer to those with fewer shares traded each day on the stock market.
Meanwhile, large-cap stocks are less affected by this phenomenon. Large corporations, being usually supported by a wider and more varied group of investors, experience less noticeable effects from any decrease in buying activity.
Buyback Blackouts are Temporary Blips and Will Pass
The combined effect of these factors – reduced company buying, cautious investors, and potential earnings surprises – could lead to a period of increased volatility in the coming weeks. However, it’s important to remember that buyback blackouts are temporary. Once the blackout period ends and companies resume their repurchasing activities, the market usually stabilizes. Additionally, other unrelated market events and investor sentiment can also play a significant role in determining overall trading activity.
Note to Investors
The next few weeks may see some choppier moves in the stock market resulting from buyback blackouts. This may even amplify existing downward tendencies. For long-term investors, this might be a time for strategic adjustments based on individual investment goals and risk tolerance.
