With this morning's USA Today headline: "Dow, S&P 500 close at records; Nasdaq at 14-year high" and me feeling pretty good about going into the Monday morning meeting (except for the back-up in gold) my first choice of visual to accompany a planned post for next week is probably a warning in itself:
Last Time Corporate America Did This, The Stock Market Crashed
The S&P 500 stock index bumbles to new highs no matter what. But it has been a slog: serial GDP downward revisions forward and backward, unceremonious abandonment of “escape velocity” for the fifth year in a row, wars or civil wars in Ukraine and Iraq with consequences for gas supplies to Europe and oil supplies to the world, US inflation heating up. And stocks nevertheless rise because.... The Fed Rules, Metrics and Ratios Are Just for Decoration.
In the Business Roundtable’s second quarter CEO survey, the chiefs of the largest US corporations weren’t exactly in an ecstatic mood either. They lowered their GDP growth forecast for the year to 2.3%; among other tidbits, they also expected to spend less money on capital investments.
Capital investments are crucial to the economy. One, they crank up GDP when the money is spent. And two, investing in productive assets creates future growth. But only 44% of these CEOs are planning to increase capital investment, down from 48% last quarter.
Companies axe capital investments brutally when dark clouds appear at the horizon. It started in early 2000 as the stock market was blowing up and lasted through the recession that followed. Then capex recovered and peaked in the summer of 2008, even as the financial crisis was spreading. In either case, that sudden cut in corporate investment deepened the recessions. This chart of new orders of non-defense capital goods (St. Louis Fed) shows the brutality of the cuts – for example, slashing them by a third from $69 billion in August 2008 to $46 billion in April 2009:
But note how the chart has stayed within its range over the last two decades – a time when the US population has soared 19% and GDP, adjusted for inflation, 51%. Turns out, corporations had found other things to do with their money: stock buybacks.
Which have been skyrocketing. In the first quarter, buybacks jumped 50% from a year ago to $154.5 billion, according to FactSet‘s report released yesterday. It was the third-largest in the data series, behind only 2007 when in Q2 and Q3 $161.8 billion and $177.9 billion were spent on buybacks, while the financial crisis was already fermenting underneath.
Tech blew $47.4 billion on buybacks, a record in the data series, up 175% from a year ago. A cool $18.6 billion of that came from Apple. IBM was in second place with $8.3 billion. Industrials, up 119% from a year ago, also set an all-time high. Overall, Apple and IBM led the pack, followed by FedEx, Boeing, Abbott Laboratories, Corning, and eBay....MORE
