Daily Camera (Boulder)

Cor­po­rate Amer­ica puts $2 tril­lion in bank in run-up to elec­tion

- By Vildana Hajric and Lu Wang Business · Finance · Investing · S&P 500 · US Stock Markets · Americas Stock Markets · Stocks & Markets · Financial Markets · United States of America · Goldman Sachs Group · AT&T · Merck & Co · S&P Dow Jones Indices · Barclays · Western Digital · Altria Group · Booking Holdings · Booking.com

Made stingy by the pan­demic and gun-shy by the elec­tion, U.S. com­pa­nies have re­con­sid­ered spend­ing plans on every­thing from share­hold­ers to fac­to­ries. As a re­sult, cash is pool­ing on bal­ance sheets, swelling rainy day funds to an un­prece­dented $2 tril­lion.

While an­a­lysts have a mil­lion ways to spend it, the mar­ket’s pref­er­ence is clear: don’t. Do­ing so has been bad for your stock. Com­pa­nies lay­ing out the most for share re­pur­chases and cap­i­tal in­vest­ments have trailed the S&P 500 since its March low, ac­cord­ing to data com­piled by Gold­man Sachs Group Inc. and Bloomberg. Over that stretch, firms with stur­dier fi­nances beat weaker ones by al­most 20 per­cent­age points.

It’s con­cern­ing when cash sits idle, par­tic­u­larly when the U.S. is try­ing to pull out of a re­ces­sion at a time when un­cer­tain­ties around vac­cines and who will be pres­i­dent re­main high. With a new fis­cal pack­age stalled in Congress and the elec­tion race get­ting chaotic, the ef­fect of tighter purse strings in Cor­po­rate Amer­ica has the po­ten­tial to go beyond mar­kets and be­come an eco­nomic story, too.

“In an en­vi­ron­ment where things are chang­ing and mar­kets are chang­ing, it may be bet­ter to wait and see how things ad­just first,” said Katy Kamin­ski, chief re­search strate­gist and port­fo­lio man­ager for Al­phasim­plex Group. “It’s less clear what the op­por­tu­ni­ties are.”

A Gold­man Sachs bas­ket of big spenders on capex has fallen al­most 7% this year ver­sus a gain of sim­i­lar size for the S&P 500. The bas­ket, which strips out sec­tor weight­ings to make sure no in­dus­try dom­i­nates, in­cludes West­ern Dig­i­tal Corp., down 38% in 2020, AT&T Inc., down 22%, and Merck & Co., off by 9%. The firm’s cash-re­turn bas­ket, in­clud­ing Al­tria Group Inc. and Book­ing Hold­ings Inc., has lost 1.5%.

Re­luc­tance to put money to work took hold when the pan­demic struck and has shown few signs of eas­ing. Com­pa­nies in the S&P 500 slashed share re­pur­chases by 46% dur­ing the sec­ond quar­ter to an eight-year low while their cap­i­tal spend­ing dropped 15%, data com­piled by S&P Dow Jones In­dices and Bar­clays showed. Paired with a rush to raise money in mar­kets amid the worst profit con­trac­tion since the global fi­nan­cial cri­sis, it’s meant cash has piled up.

Ane­mic cor­po­rate spend­ing is po­ten­tially self-ful­fill­ing when it comes to the im­pact on growth. With the econ­omy slug­gish, com­pa­nies are re­luc­tant to de­ploy cash, starv­ing the econ­omy of much-needed fuel. Add to that virus cases spik­ing in many ar­eas and blue-chip com­pa­nies an­nounc­ing tens of thou­sands of lay­offs.

“If we had more clar­ity that we would have a sus­tained fis­cal cush­ion and that things were go­ing to start to sta­bi­lize longert­erm, I think it would be very rea­son­able for com­pa­nies to start look­ing for pro­duc­tive us­age for that cash,” said Ge­orge Pear­kes, Be­spoke In­vest­ment Group’s global macro strate­gist. “But, if I’m a man­age­ment team right now, why would I get rid of cash when I’m see­ing the eco­nomic data that I’m see­ing?”

An anal­y­sis by Bar­clays strate­gists led by Shob­hit Gupta and Ma­neesh Desh­pande — which sifted through cor­po­rate earn­ings calls and ac­counted for lead­ing eco­nomic in­di­ca­tors — showed a muted re­bound for such ex­pen­di­tures for the next three quar­ters.

Some op­por­tu­ni­ties to spend cash proved brief. The March sell­off was swift and so was the re­bound, giv­ing deal-mak­ers lit­tle time to do takeovers. Out­side the phar­ma­ceu­ti­cal and tech­nol­ogy in­dus­tries, ac­tiv­ity re­mains muted. An­nounced merg­ers and ac­qui­si­tions to­taled $2.1 tril­lion dur­ing the first nine months, 22% lower than the same pe­riod a year ago, data com­piled by Bloomberg show.

Now, with the S&P 500’s priceearn­ings ra­tio el­e­vated to around levels seen al­most two decades ago, takeovers don’t look like a smart use of cash. Nei­ther do share buy­backs, some­thing that has been fre­quently crit­i­cized by politi­cians for en­rich­ing the wealthy. It’s an­other co­nun­drum busi­ness lead­ers face when mil­lions are out of jobs.

“The pan­demic-trig­gered buy­ing op­por­tu­ni­ties didn’t last long enough to stim­u­late an M&A boom,” said Ed Yar­deni, pres­i­dent of Yar­deni Re­search. Buy­backs are “busted for now,” he added.

 ?? Chris Hon­dros / Getty Im­ages ?? A fi­nan­cial pro­fes­sional works in the Gold­man Sachs booth on the floor of the New York Stock Ex­change April 16, 2010 in New York City.
Chris Hon­dros / Getty Im­ages A fi­nan­cial pro­fes­sional works in the Gold­man Sachs booth on the floor of the New York Stock Ex­change April 16, 2010 in New York City.

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