Small Caps Don’t Often Do Buybacks. Problem.

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Small Caps Don’t Often Do Buybacks. Problem.

Three Data items today:

#1: Oil prices. We’ve been getting some client questions on whether higher oil prices might slow a US economic recovery. Today’s $61/barrel level is slightly higher than the 2019 average spot price of $57/barrel, so we are certainly facing “peak economy” energy prices with less-than-peak economic conditions.

We’ve thought about this issue for decades, thanks to our time covering the auto industry through the 1990s, and our framework is to use annual percentage changes in crude and gasoline prices. Households tend to budget $X for gasoline, so when it goes to 1.5 “X” or 0.5 “X” over a year they adjust their spending accordingly.

Here is a chart with that year-over-year change in WTI crude (blue line) and gasoline prices (red line) back to 2000. We’ve used biweekly data to smooth out that short run of negative crude prices last year.

Two brief points on this:

First, you can see that oil and gasoline prices do snap back after recessions, but that’s as much correlation as causation. That pop you see after the 2001 recession bar was Gulf War II, not a sudden increase in oil consumption caused by economic expansion. The post-2008/2009 Great Recession we’ve noted (104 pct annual increase in oil prices, 59 pct increase in gas prices) was however due to a nascent global economic recovery.

Second, the latest year over year comparisons are a +132 percent increase in oil prices and +31 percent for gasoline prices. While the first reading is somewhat eye-popping, it’s actually not the highest comp in this data series. Feb 2000 got to 150 percent which is, by the way, why the US economy was set for a fall even without the dot com bubble bursting.

Takeaway: this data says oil/gasoline prices are not yet in the danger zone relative to past economic recoveries. It is, however, important to note that US gasoline consumption has been far below normal for a year now. As Americans start to commute and travel again, their household budgets will have to reincorporate this expense. Over the short term, fiscal stimulus checks should help bridge this gap.

#2: S&P was out with some fresh S&P 500 stock buyback and dividend data:

  • Q4 2020’s total buybacks came in at $131 bn. This is a decent snap back from Q2’s $89 bn and Q3’s $102 bn.
  • Worth noting: Apple’s repurchase program represents 21 percent of all Q4 2020 S&P buyback volume and 24 percent of the uptick from Q3. Also, the top 20 companies in terms of buyback dollars spent in Q4 represented 66 percent total repurchases.
  • Q4’s buyback run rate is still 41 percent off the last cycle’s peak quarterly buyback rate of $223 bn in Q4 2018.
  • Dividend payouts are faring better. Q4 2020 saw $119 bn in payouts, as compared to Q3’s $116 bn and Q2’s $119 bn. Peak S&P dividend in the last cycle was actually in Q1 2020, at $127 bn (just 7 percent higher than Q4 2020).

Takeaway (1): buybacks are back and should accelerate in 2021 with large banks now able to repurchase shares and Tech companies still highly profitable.

Takeaway (2): dividends are the thing to watch, since they are an important signal of corporate/board confidence in future earnings power and not as concentrated in terms of names as buybacks. Q4’s dividends are back to Q2 2019 levels, a fundamental signal that the companies of the S&P do not think their earnings potential has been impaired by the Pandemic Recession.

Takeaway (3): We want to take a moment to reiterate last night’s comments about small cap/Russell 2000 vulnerability right here. Even with today’s selloff, the Russell is still almost 20 points out of balance with recent S&P 500 performance. We hit March 2000 levels of small cap/large cap return imbalance in February 2021 (using trailing 100-day returns). Buybacks are one more reason we think US large caps will outperform small caps in coming weeks. Small caps are usually growth stocks; they don’t often do repurchases.

#3: The New York Fed’s Weekly Economic Index has suddenly accelerated. While this indicator doesn’t get as much press as the Atlanta Fed’s GDPNow model or the New York Fed’s Nowcast, we like it because it includes real world inputs like electrical utility output, gasoline consumption, and Federal tax withholding.

The important thing here is that this indicator has finally flipped positive (latest reading +1 pct) and, because it is based on year-over-year comparisons, it will only improve from here.

Takeaway: given the unusual ways the Pandemic Recession unfolded (WFH, business closures, etc.), sequential economic indicators have been lumpy and made widely watched indicators like GDPNow borderline unusable. The WEI is a cleaner measure of momentum and year-over-year comps, two things investors really care about. Seeing it accelerate since mid-February is a positive sign.


S&P buyback data in detail:,%2Fequity%2Fsp%2D500