(Matias Baglietto/NurPhoto/Getty Images)
The US economy appears to have swerved away from immediate risk of recession. The labor market is strong, growth has surpassed estimates and inflation is easing. A new CNN poll even shows that the public's long-held pessimism about the economy is letting up.
But America's publicly traded companies are flashing a key sign of economic uncertainty — they've been hoarding cash.
What's happening: Americans have spent down their pandemic-era savings and then some. Credit card and auto loan delinquencies have not only surpassed pre-pandemic levels, they're the highest they've been in more than a decade.
US corporations, however, are clinging to their money — they increased their cash on hand through the first half of last year by 13% to $2.35 trillion from $2.08 trillion at the end of 2022. Firms also cut back on share buybacks, according to the most recent "Cash Pile" report from Moody's Investors Service.
There's a high opportunity cost to holding onto cash. Companies can potentially earn higher returns investing in their own business or in securities than they can from the relatively low interest rates on deposits.
And companies with existing and expensive debt in a high-interest rate environment would likely want to use their cash to pay it down. So why hold on to expensive, depreciating cash?
The impetus "is the level of uncertainty that we are facing," Vijay Govindarajan, a professor at Dartmouth's Tuck School of Business, told CNN. "From Covid to the wars [in Ukraine and the Middle East], there is a lack of predictability all over the world. About 60 countries have elections this year, and even the concept of democracy is in question."
That uncertainty, he said, is why companies want to keep their assets liquid – so that they have maximum flexibility in a world that is highly unpredictable.
"This is the time to think about cash as a strategic weapon," said Govindarajan.
About 3% of publicly traded companies get delisted from exchanges each year for failures caused by supply chain disruptions, labor strikes, changes in demand and technology disruptions, according to a research report by Dartmouth's Govindarajan, Anup Srivastava at University of Calgary's Haskayne School of Business and Chandrani Chatterjee at the University of Texas at Arlington.
But a 10% increase in a firm's cash holdings correlates to a 5% decrease in the likelihood of such a delisting, the report found.
"We interpret this correlation as evidence that cash reserves act like insurance against sudden economic shocks," wrote the researchers.
A growing concern: Nearly a quarter of shareholders rated access to liquidity as their top concern in 2024, according to an annual poll of institutional traders by JPMorgan. Only market volatility ranked higher.
Comments
Post a Comment