ETFs and Buybacks Fuel 2019 Rally as Investors Avoid Single Stocks

The 2019 stock rally is being fueled by two largely overlooked catalysts: a 58% increase in stock buybacks and a 5-fold rise of inflows into ETFs in the last week alone, per data from Bank of America Merrill Lynch. Strikingly, this is happening as retail and institutional investors alike have been net sellers of shares, illustrated by $1.48 billion in single-stock sales in the week ending March 1, according to a detailed story in CNBC .

This is a source of concern for at least one stock market strategist. "The fund flows show you that, while we've had a solid recovery off the Dec. 24 lows, the participation rate--both institutionally and by retail investors--has not been there," said Art Hogan, chief market strategist at National Securities, per CNBC. "You're seeing this V-shaped recovery in markets and yet positioning is still very light," he added, while also cautioning, "There is a feeling the market is running out of steam." The table below outlines the key forces pushing stocks up.

What's Driving The 2019 Rally

(A look at the week ending March 1, 2019)

• Buybacks were $1.4 billion
• Buybacks are up 58% year-over-year (YOY), on pace for a record year
• ETF net inflows were $854 million, more than 5 times the prior week
• Net sales of individual stocks were $1.48 billion
• This was the second straight week of net sales of stocks
• Institutions were net sellers of all sectors except materials and utilities
• Retail, or individual, investors were net sellers of every sector
• Both retail and institutional investors were net buyers of ETFs

Source: Bank of America Merrill Lynch; per CNBC

Significance For Investors

Though the S&P 500 Index (SPX) is up by 11.3% thus far in 2019 through the open on March 6, Hogan believes that many investors are still rattled by the sharp sell-off that occurred in December. "The short-term muscle memory of how quickly things collapsed is still there, even though some of the things that caused it have reversed," he said.

ETF Surge

Nonetheless, even though investors are becoming more hesitant about owning individual stocks, the rush into ETFs has been brisk. For the entire month of February, U.S.-listed ETFs enjoyed net inflows of $22 billion, swelling their total assets to $3.75 trillion, according to ETF.com. To meet the brisk demand, net creations, or the issuance of new ETF shares, by U.S. equity ETFs were valued at more than $13 billion in February. For ETFs investing in international stocks, net creations were about $1 billion, while the figure was $9 billion for fixed income ETFs.

Buyback Boom

Share repurchases by the issuing corporations have been a leading source of demand for stocks throughout the current bull market, and thus a principal driver of stock market gains. Since 2009, stock buybacks have totaled about $5 trillion, adding roughly 2% to the annualized growth rate in earnings per share (EPS), according to analysis by Dubravko Lakos-Bujas, head of U.S. equity strategy at JPMorgan, per Barron's.

He calculates that S&P 500 share repurchases announced in 2018 were about $938 billion, almost double the 2017 figure. Repatriations of overseas cash were approximately $570 billion across the first three quarters of 2018.

Looking Ahead

Lakos-Bujas expects that S&P 500 companies will announce about $800 billion of buybacks this year, funded mainly with cash reserves rather than with debt. He notes that U.S. corporations still hold about $1 trillion cash overseas, and anticipates that they will repatriate large sums again in 2019. Much of that is likely to flow into buybacks, further bolstering stock prices.