The sneaky way that the Fed may be hurting stocks

It appears that corporate buybacks have started to slow.

S&P 500 companies spent $134.4 billion to repurchase their own shares in the second quarter according to FactSet, which might sound like a lot of cash, but represents a 6.9 percent drop from the first quarter. This as several companies, such as Pfizer and Verizon, slashed their buyback programs, and 12 fewer companies repurchased shares in the quarter.

Some say expectations around the Federal Reserve have a lot to do with the buyback decline. Even though the central bank elected to keep its benchmark rate near zero Thursday, fears of higher rates are causing companies to rethink their capital return program, posits Boris Schlossberg of BK Asset Management.

"Even though rates have not gone up, we clearly are in a tightening position in terms of monetary policy, and I think they're looking ahead and saying, 'Do I really want to finance this thing with no-longer-cheap money that we used to have a couple months ago?'" Schlossberg said Tuesday in a "Trading Nation" segment.

If the cost of borrowing does indeed rise, borrowing money to buy stock clearly becomes less attractive.

Coming at the issue from a bond-market perspective, Nomura's U.S. head of rates strategy, George Goncalves, made a similar point last week, writing that "record corporate issuance" can be pegged on companies being "in a hurry to prefund their needs and/or continue their stock buybacks. But as we are getting closer to the first hike (corporate borrowing costs could start to rise) there could be a sudden drop in new issuance volumes."

Indeed, it doesn't appear that the buyback decline can be pegged purely on any one sort of company. Out of the 10 S&P sectors, only the consumer discretionary and materials sectors saw an increase in buybacks, according to FactSet.

Read MoreMoody's to CEOs: Think twice before buying back stock

If buybacks don't reaccelerate, that could potentially be a problem for the overall market.

As Stacey Gilbert, head of derivative strategy at Susquehanna, pointed out Tuesday, when a company buys back its shares, it greatly reduces the chance that its stock drops significantly.

And the average company that has bought back shares has done better than the average company that hasn't, producing an average monthly return of 0.73 percent versus 0.57 percent over the past 10 years, according to FactSet.


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Trading Nation is a multimedia financial news program that shows investors and traders how to use the news of the day to their advantage. This is where experts from across the financial world – including macro strategists, technical analysts, stock-pickers, and traders who specialize in options, currencies, and fixed income – come together to find the best ways to capitalize on recent developments in the market. Trading Nation: Where headlines become opportunities.

Michael Santoli

Michael Santoli joined CNBC in October 2015 as a Senior Markets Commentator, based at the network's Global Headquarters in Englewood Cliffs, N.J.  Santoli brings his extensive markets expertise to CNBC's Business Day programming, with a regular appearance on CNBC's “Closing Bell (M-F, 3PM-5PM ET).   In addition, he contributes to CNBCand CNBC PRO, writing regular articles and creating original digital videos.

Previously, Santoli was a Senior Columnist at Yahoo Finance, where he wrote analysis and commentary on the stock market, corporate news and the economy. He also appeared on Yahoo Finance video programs, where he offered insights on the most important business stories of the day, and was a regular contributor to CNBC and other networks.

Follow Michael Santoli on Twitter @michaelsantoli

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