Corporate Cash Hoards Buoy Stocks

Corporations are sitting on huge piles of cash and that should make you bullish on the stock market. There’s an old saying on Wall Street: “Revenue is vanity, profit is sanity, but cash is king.” More about that in a minute.

Stocks started the trading session Monday in the red, as investors got spooked over the Taliban’s abrupt takeover of Afghanistan, but equities reversed direction as the day unfolded. Investors decided that fundamentals at home mattered more than military events in a remote part of the world.

The ramifications of President Biden’s decision to pull the plug on America’s 20-year involvement in strife-torn Afghanistan remains unclear. The long-running conflict has cost the U.S. an estimated $2.3 trillion, with more than 241,000 people dying as a direct result of the fighting. The yakkers on cable TV have been debating the pros and cons of Biden’s move, displaying their usual unedifying emotionalism.

But for now, instead of the balance of power, Wall Street is focusing on the power of balance sheets.

On Monday, the Dow Jones Industrial Average rose 110 points (+0.31%), the S&P 500 climbed 11.71 points (+0.26%), and the tech-oriented NASDAQ dropped 29.14 points (-0.20%). The Dow and S&P 500 hit new all-time highs.

In pre-market futures trading Tuesday, U.S. stocks were trending lower. Souring investor moods are negative factors such as the persistence of COVID Delta and signs of slowing growth in China.

But one bright spot for investors is the enormous pile of corporate cash waiting for deployment. According to S&P Global, cash and short-term investments on corporate balance sheets in the second quarter of 2021 have reached a record high of $6.84 trillion. That level is 45% higher than the average in the five years before the pandemic’s outbreak in early 2020 and a nearly 3% increase compared to Q1.

The undisputed power of cash…

We’re witnessing unprecedented fiscal and monetary stimulus, in the U.S. and in countries around the world. Several pundits on the political right dispute the multiplier effect of government spending. But no one, left or right, argues against the beneficial effect of private sector spending on economic growth.

By choosing to save, corporations have put themselves in a strong position to survive a crisis in future months, such as a sudden worsening of the COVID outbreak.

The current stock market rally is supported by strong underlying businesses and surging corporate revenue and profits. Another pillar is ample cash flow (see chart, with data as of July 29, 2021).

Consumers have been stockpiling cash as well. Whether it’s consumers or corporations, the motivation to hoard cash is the same: uncertainty. Savings help create a buffer against bad situations turning even worse.

Companies are likely to put these savings to work investing in productivity enhancement; upgrading information technology infrastructure and factories; bringing in consultants to help streamline businesses; and outsourcing routine office functions. They’re also poised to use that cash for stock buybacks and mergers and acquisitions.

We’re already seeing the fruits of similar efforts undertaken in past years. Recent jumps in productivity can be traced to efforts to improve efficiency.

It’s not just U.S.-based corporations. Multinationals overseas also are sitting on enormous cash hoards and their equity valuations are in many cases a bargain.

Watch This Video: “Synchronized” Global Growth Is Back

A shrewd investment move now is to increase your exposure to international equities, especially in emerging markets where the recovery is on track to be the sharpest.

Regardless, the overriding factor behind cash stockpiling is the hope that eventually all that cash will be deployed, thus kicking off the next surge in economic growth and the next leg of the stock market rally.

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John Persinos is the editorial director of Investing Daily. Send your questions or comments to mailbag@investingdaily.com. To subscribe to John’s video channel, click here.