Published February 11, 2022
In the face of a fair amount of gloom as the stock market continues struggling to find traction, we turn to a positive piece from our friends at DIM. They walk through some of the supports for the stock market that, over time, might provide some lift once interest rate outlooks settle down.
“There are many measures of corporate “cash.” Whatever measure of cash is used, the trend is the same. Cash positions on corporate balance sheets have risen sharply in the past two years as a result of strong earnings, federal Covid relief money and extreme low interest rate borrowing. Today, cash on corporate balance sheets conservatively measured by time and savings deposits (not including banks) is roughly $344 billion, up from about $190 billion two years ago.
As equity holders, we should benefit from this cash stockpile. Management teams are not paid to have too much cash on the balance sheet. They are paid to put the cash to work to enhance shareholder value. This is done via investments in the business (capital expenditures), mergers and acquisitions, stock buybacks and increased dividends.
Capital expenditures are up 18% year-over-year and 19% relative to the fourth quarter of 2019 (pre-Covid).
2021 was a record-breaking year for mergers and acquisitions. Rob Kindler, Global Head of M&A at investment bank Morgan Stanley says about the outlook for 2022: “While it may not be another record year, all the key elements that made the 2021 M&A market so strong are largely in place”
Share buyback authorizations also reached record highs in 2021 and the record pace of buybacks is expected to continue in 2022.
For the past three years, the S&P 500 dividend growth rate has been roughly 10%. Barron’s projects continued and possibly an accelerating dividend growth rate: “Dividend growth has not caught up with the massive earnings recovery since 2020, as companies remain cautious about distributing cash in a less certain environment.”
With more than half of the S&P 500 having reported fourth quarter earnings, it looks like earnings growth will be roughly 27%. This will mark the fourth straight quarter of earning growth above 25%.
Rapidly rising interest rates are the most clear and present threat to stock appreciation. A 7.5% year/year increase in the Consumer Price Index (CPI) reported this week is the highest level of inflation since February 1982 and has helped propel the 10-year U.S. treasury rate to 2% for the first time since mid-2019. Over the past year, strong earnings growth has lifted the market higher despite contraction in the Price/Earnings (P/E) multiple as a result of rising rates. It is likely that the interplay of stock appreciation fueled by strong earnings growth will continue to be only partially offset by higher interest rates and a contracting P/E.”
Last week, stocks shirked off a midweek selloff to finish higher. This week it was the opposite as a rally attempt succumbed to furious selling by week’s end. The Monday session was relatively benign with markets toggling between gains and losses before closing lower by -0.4%. Stocks reversed course Tuesday with a +0.8% gain despite another tick higher in interest rates as, for one day at least, oil prices dropped back and money rotated back into beaten-down tech shares. The move gained strength Wednesday as Disney (DIS) shares shot higher on strong earnings adding to a solid rebound in semiconductor and software stocks. The Nasdaq rose a full +2% for the day. The market appeared to digest a hot inflation report Thursday recovering from an early loss to break even, until an interview with a Fed Governor sent the bulls running for cover. St. Louis Fed lead Bullard told a reporter that he can see interest rates rising a full +1% by June-end, a notably faster pace than markets have priced in. Yields popped higher on the comments with the 10-year note rising above 2% for the first time since late 2019. Stocks took a swan dive to close down -1.8%. It was an ugly day as all indexes suffered a major negative reversal, giving up notable gains to close lower. The sour mood carried over into Friday with investors ready to exit on any hint of bad news. The trigger came from a White House notice that Russia could invade Ukraine any day now. The market panicked into a -3% swoon on the Nasdaq with semiconductor stocks giving up all of their recent rally and then some.
Whew! Market volatility spiked again as we closed the week with the S&P 500 down -1.84%, offsetting the prior week’s gain. The Nasdaq 100 (QQQ) lost -3.06%, basically all on Friday. Smallcap Russell 2000 (IWM) managed to hold on to a gain for the week, higher by +1.51%.
Warm wishes and until next week.