The Sanders-Schumer proposal to limit buybacks could be a very big negative for the stock market

Key Points
  • Sens. Charles Schumer and Bernie Sanders outlined a plan Monday that would restrict how companies repurchase their own shares.
  • One Wall Street veteran estimated that such a move could have a "meaningful" impact on stocks, which have relied on buybacks and Fed intervention during the bull market that started in 2009.
  • The plan faces political roadblocks in the Senate and likely from President Donald Trump.
Watch four experts debate Schumer and Sanders' plan to limit stock buybacks

A Democratic proposal that would limit stock buybacks takes dead aim at one of the market's main pillars of support for the past decade.

The trillions spent on share repurchases since the current bull market began in March 2009 have helped keep a floor under Wall Street even when times got bad. Last year was not a very good one for the market, with the S&P 500 down more than 6 percent, but companies' willingness to step in and buy their stock likely kept the damage from being even worse.

However, the issue has been a hot one, particularly among 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.

That sentiment helped fuel a measure being proposed Sens. Charles Schumer of New York and Bernie Sanders of Vermont who said in a New York Times op-ed that they want to apply "preconditions" on buybacks that would force $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 seeks to address the wealth gap, Wall Street pros worry about its disruptive potential for markets.

"If the populist attacks become enacted, they will be meaningful," said David Santschi, director of liquidity research at TrimTabs, which tracks where cash is going in the marketplace. "I don't think it's the government's job to tell companies how they can spend money."

Buybacks shattered a record in 2018, surging to $1.04 trillion and doubling 2017's output.

Big tech companies and Wall Street banks are usually the leaders in gross purchases. Apple, for example has executed more than $250 billion in repurchases over the past decade through 2018, according to S&P Dow Jones Indices. Embattled banking titan Wells Fargo did more than $63 billion during the period, while Microsoft surpassed $100 billion.

The top 20 repurchasers alone bought back more than $1.1 trillion in the decade.

Even Warren Buffett's Berkshire Hathaway, which almost never participates, announced some $928 million worth in 2018.

"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."

The buybacks have worked hand in glove with Federal Reserve monetary policy, which has kept interest rates at borrowing-friendly lows and for years pumped in trillions of liquidity to markets through an aggressive bond-buying program that pushed the central bank's balance sheet to $4.5 trillion.

Pisani analyzes the Schumer, Sanders proposal to limit buybacks

With the Fed on the sidelines and buybacks under attack, that could set up even more challenging circumstances for investors, who survived a downturn last year that briefly skated into bear market territory.

To be sure, Schumer and Sanders, the latter of whom is likely a Democratic presidential contender in the 2020 race, will have a hard time getting their plan approved. While the House is in their party's hands and likely to be more receptive, the Senate remains Republican and President Donald Trump likely would have misgivings over a plan that would strike so directly against Wall Street.

"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."

In fact, Roberts said, there could be some positives: If the ultimate result is getting companies to invest more money in their businesses and personnel, it could provide an economic boost particularly along with Trump's focus on discouraging companies from 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."