A Democratic proposal to limit stock buybacks holds the potential to create negative effects on the stock market, as it takes aim at one of its main pillars that have provided support for the past decade. Since the current bull market started in March 2009, the trillions spent towards share repurchases helped Wall Street remain afloat even when times were tough. Despite the market decline last year, in which the S&P 500 decreased more than 6 percent, the willingness from companies to step in and purchase their stock is what likely kept the damage to a minimum.
However, this issue is rising amongst progressives who believe companies “ should be doing more with their cash than rewarding shareholders and putting money in the pockets of executives who ultimately benefit from higher stock prices,” as CNBC reports.
These views sparked a proposal from Sens. Charles Schumer of New York and Bernie Sanders of Vermont. In a New York Times op-ed, the two said they want to apply “preconditions” on buybacks which would demand $15 an hour wages, paid time off and health benefits.
“At a time of huge income and wealth inequality, Americans should be outraged that these profitable corporations are laying off workers while spending billions of dollars to boost their stock’s value to further enrich the wealthy few,” the senators said.
While the measure is focused on addressing the wealth gap, Wall Street experts are concerned that it will interfere with the markets. “If the populist attacks become enacted, they will be meaningful,” said David Santschi, director of liquidity research at TrimTabs. “I don’t think it’s the government’s job to tell companies how they can spend money.”
CNBC reports buybacks broke a record in 2018, in which it surged to $1.04 trillion, doubling 2017’s output. Just the top 20 repurchases bought back over $1.1 trillion in the decade. “That’s a lot of moves that have a lot of buying power,” Santschi said. “If you have a significant slowdown in buybacks, it would have a significant impact on markets.”
Schumer and Sanders will be faced with a challenge when it comes to getting their plan approved, despite the House being in their party’s favor. “This is what I’d call the opening round in terms of what’s going on,” said Doug Roberts, managing principal at Channel Capital Research. “I don’t think it’s going to make its way through the Senate.”
On the other hand he mentioned some positives, such as if the ultimate result is to get companies investing more money into their businesses and personnel, it could further provide an economic boost, in addition to Trump’s focus on advising companies to avoid building abroad. “That seems like a Goldilocks effect,” he said. “On a technical level, [the buybacks restrictions] may restrict them a little bit. But it also may be offset with an economic effect.”