CASH on balance sheets of Businesses at 37 year high: Good News?

Liquid Assets and CASH on balance sheets of Corporate America at 37 year high

A Bullish Sign?

A number of analysts have concluded the sudden increase in liquid assets on the balance sheets of corporations is a bullish sign for the equity markets. One rationale is based on a possible increase in corporate mergers and acquisitions (M&A) activity. History has shown that corporations with large amounts of cash will pursue acquisitions, either of competitors or as extensions of their corporate strategy. With interest rates for prime corporate borrowers at attractive historical rates and the current modest rates of overall economic growth, the argument for increase in M&A activity as a means of growth is a persuasive one. If a company can’t achieve its long-term growth targets via internal growth, M&A (especially acquisitions) can become an attractive alternative.

Another view is that corporations are conserving cash and liquid assets until signs of basic improvement in the macroeconomic outlook justify spending and investing. While this was noted as a bullish argument in the last section, the market bears note that a reluctance to anticipate a strong recovery by corporations is a tacit expression that the risk of sliding back into a second (double-dip) recession is a possibility, albeit an unlikely one.

Whether bullish or bearish, the rapid growth in corporate liquid assets does reflect one undisputable fact: This sector of the economy generally responded quickly and effectively to the Great Recession, cutting costs, shedding excess inventory and curtailing unnecessary investments. As a result, corporations are poised to perform well based on the overall strength of the current economic recovery. Earnings growth over the past five quarters has been impressive. However, whether this trend and rate of earnings growth can continue will increasingly depend on what happens to the top line (revenues). And in turn, much of what happens here will depend upon the willingness of consumers to regain confidence in the economic outlook and resume spending.
Source: American Century Investments

Saverio Manzo
www.saveriomanzo.com