By Louis Cordone, Senior Vice President of Data Strategy at EQ + AST
The U.S. economy is in the midst ofa downturn, as inflation remains stickier than expected and unemployment begins to increase after falling to pre-pandemic levels July.
The U.S. economy has been dealt a series of blows mostly due to stubbornly high inflation on core items such as energy, food, and housing. The Federal Reserve is battling this inflation by taking cash out of the market through interest rate increases as well as other measures. The Fed’s actions created investment alternatives to the equity markets for investors. These alternatives hit at the precise time investors were looking to preserve capital. Cash and cash-like investments were the preferred safe-haven investment choice for investors and companies, alike. The sudden rotation of capital out of stocks and into cash triggered a drastic drop in the stock markets, significantly knocking down corporate valuations.
Despite lower valuations, corporate America is still in a strong position to weather this economic storm. This is due to a number of factors, including the reluctance for companies to take on new debt and a large amount of cash on company balance sheets.
So why is corporate America doing so well while the rest of the economy suffers? Well, it is largely because corporate America has positioned itself for success in the event of a downturn. There are a few key reasons:
The Federal Reserve has hiked rates by 75 basis points once again
This month, the Federal Reserve hiked its key federal funds rate by for the fourthtime in a row. This aggressive move was made in an effort to curb inflation and slow down the economy. The Fed has signaled that will continue to be hawkish on inflation, but we are seeingthe costs of two major contributors to the inflation come down (i.e., energy and housing).
As interest rate hikes cease, investors will look to increase their returns by looking for bargains in the equity markets. With many investors holding cash and cash-like assets, this money is readily accessible and can quickly shift back into equities that are undervalued.
A dive into the Q3 labor market to promote steady growth
The US economy delivered strong growth for the first three quarters of this year, with the dollar GDP increasing by 6.7%. This trend is likely to continue through the last quarter of 2022.
As employment remains strong, the economy is expected to continue its steady growth. Of particular interest is the job environment at slow growing but stable companies. This is because these two sectors are the largest employers in the US and are crucial for maintaining steady growth. The average income of middle-class families is directly tied to price inflation and job growth.
U.S. corporations have more cash on hand than ever before, which will help to offset the loss of consumer spending during this economic downturn.
Corporate actions
Many corporations have been choosing to deploy their cash into corporate actions. Amazon has acquired iRobot, General Motors reinstated its quarterly dividend payments, and other big name tech companies such as Google, Apple, and Microsoft have been investing in several new cutting-edge areas.
An increase in corporate actions shows that companies are looking to reinvest cash in their business for future growth or return shareholder value. This could signify that corporations aren’t very concerned about a recession and no longer feel the need tofund their war chests. Furthermore, companies are looking to bolster their valuations, focusing on making their company more attracting to the investors seeking bargains in the equity market.
Consumer spending has remained steady
The fact that consumers have continued to spend even as they remain doubtful about the future is a sign that their optimism is picking up.
Lower gas prices and the end of the soft drink tax in many states helped to keep consumer spending strong over the summer and throughout the fall. Households also spent more on services, which is a positive sign for the service sector, one of the key areas of the economy hit particularly hard during this downturn.
As the Federal Reserve’s hawkish approach to inflation continues to put pressure on stock prices, corporate America is doing well financially. The economic downturn has been caused by numerous factors, and it is too early to tell which will hold the key to sustainable growth. However, with a concerted effort from corporate America, corporations are likely toemerge from this storm much stronger than before. As prices go up and jobs are cut, more companies should look to develop long-term strategies instead of relying on quick fixes.
With these things in mind, it’s easy to remain optimistic about the short and long-term performance of US equities. While the situation continues to be volatile, long-term investors should continue to focus on the fundamentals of each company and let the fluctuations take care of themselves.
About EQ + AST:
EQ + AST are the partners of choice across all stages of the corporate lifecycle. Together, we are a leading provider of ownership data management, analytics and advisory services to public and private companies as well as corporate issuers and mutual funds. EQ + AST offer a comprehensive product set, including transfer agency services, cap table management, equity compensation services, proxy solicitation and advisory services, private company solutions and bankruptcy claims administration services. Affiliates include, D.F. King and Co., Inc., AST Private Company Solutions, Inc., and Donlin, Recano& Company, Inc. Learn more at: www.astfinancial.com and www.equiniti.com/us
