Story Highlights:
>S&P 500 companies held $932 billion in cash and cash-equivalents at the end of last year-up 31% annually and 8% in the fourth quarter alone.
>We expect increasingly confident executives will deploy that cash, driving economic growth and profits-and that’s bullish for stocks looking forward.
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There’s a battle on in Washington-that has nothing to do with health care. House Representative Patrick McHenry wants to replace Ulysses S. Grant on the $50 bill with Ronald Reagan. Heaven forbid! Should investors fear such upheaval? Probably not. Whether the Gipper or US Grant rules greenbacks, cash is corporate king currently. And that’s bullish for stocks looking forward.
S&P 500 companies held $932 billion in cash and cash-equivalents at the end of last year-up 31% annually and 8% in the fourth quarter alone. The corporate cash preference is nearly universal. Whether it’s Apple’s roughly $25 billion hoard, Costco’s and Coca-Cola’s cash-rich balance sheets, or BHP’s bulging bottom line-firms are awash in liquidity. So, long live the king? Not so fast. The mere existence of high cash balances isn’t what matters. Stashing cash can coincide with a shaky economy. Or poorly managed firms may be cash-heavy because they’ve been forced to sell off productive units. Neither is necessarily a good omen for stock prices.
The better question: Just how hot is all that money? Is it burning holes in pockets? If not, and companies continue hoarding-not so great for the economy and stocks. But if it’s smoking (as we suspect), watch out-good news for the market. Confident executives should begin shifting from cash hoarding to spending. If not willingly, then they’ll be forced by shareholders seeking value. Cash doesn’t hold a candle to the productive possibilities of business investment-especially not at today’s ultra-low interest rates. We think businesses are increasingly confident, and for good reason. Among other improving economic news: US GDP posted +5.9% Q4 growth, January manufacturing activity burst higher, February’s too, and Emerging Markets beat Q4 economic expectations.
As the broad redeployment of cash picks up, it should be bullish for stocks. In the beginning, dollars will fund economic recovery-restarting idling equipment, gassing up trucks and tractors, and rehiring workers. A little later, businesses will fund economic expansion by bringing on new machines, new workers, etc. When firms are lean (as they typically are after a downturn and certainly are now), business investment drives profits. Expect that process to continue for awhile yet. But don’t worry if it slows a bit down the line. When one economic engine grows tired, another often takes over. Eventually, free cash may find its way into mergers and share buybacks-reducing share supply, increasing earnings, and bumping stock prices higher. We’re seeing some of that now, but don’t expect it to really hit its stride until later.
Cash is king for now. But its days are numbered-and that’s great news for investors.
Disclaimer: This article reflects personal viewpoints of the author and is not a description of advisory services by its author’s employer or performance of its clients. Such viewpoints may change at any time without notice. Nothing herein constitutes investment advice or a recommendation to buy or sell any security or that any security, portfolio, transaction or strategy is suitable for any specific person. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.
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