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  • Investors pulled a record amount of money out of exchange-traded funds and mutual funds during the first three weeks of February, according to UBS data.
  • The firm says US stocks hung in there admirably considering this pressure, and it attributes their resilience to two secret weapons.

February was not kind to stock traders.

It started with bang, as the benchmark S&P 500 suffered through its first 10% correction in years. That made the rest of February an uphill slog for the index, which finished down 3.9%, its worst month since January 2016.

But that’s not all. Behind the scenes, investors were fleeing the scene of the wreckage.

They pulled a record $42 billion out of exchange-traded funds (ETFs) and mutual funds during the first three weeks of February, according to data compiled by UBS. That, combined with an addition $31 billion of net futures selling, was nearly double peak selling levels seen during similarly rough patches in 2008, 2011, and 2016, the data show.

Screen Shot 2018 03 01 at 8.22.20 AMWith all of that going against the stock market, the S&P 500’s decline in February seems downright reasonable to UBS. But why? The firm says it’s because two of the market’s secret weapons — share buybacks and mergers and acquisitions — saw an uptick at exactly the right time.

Buybacks specifically have served as a safety net of sorts for the stock market throughout the almost nine-year bull market. Their accretive effect on share prices is a crucial upward catalyst for equities during periods devoid of other positive drivers.

Which is why the $250 billion of buybacks announced over the past three months — close to the record set in 2015 — have been so important in minimizing damage from the recent sell-off. UBS also notes year-to-date buyback announcements have been nearly double their post-financial crisis average, which suggests a “big pick-up” ahead, through the end of 2018. 

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As for M&A, there’s been $500 billion worth of activity over the past three months, according to UBS, which says the annualized rate is “well above prior peaks.”

Going forward, UBS expects buybacks and M&A to be not just support beams for the stock market, but also actively upward drivers. That suggests a full recovery from the early-February correction may soon transpire, and hints at a strong 2018 to come.

“The surge in buyback and M&A announcements suggests corporates are once again providing the fuel for the next leg up in equity markets,” Keith Parker, head of US equity strategy at UBS, wrote in a client note.

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SEE ALSO: BAML: There are 2 catalysts that can make this the ‘greatest bull market of all time’

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