- The Fed released its Flow of Funds report Friday.
- Americans' net worth fell in Q2, but that is to be expected due to the stock market correction.
- During this time period, non-financial companies remained very liquid, maintaining $1.84 trillion in cash on their balance sheets.
- Companies can't hold that $1.84 trillion forever; shareholders will insist something be done with the money—and when that happens, stocks and the economy should have reason to cheer.
(Editor's Note: MarketMinder does NOT recommend individual securities; those mentioned below are simply examples of a broader theme we wish to highlight.)
The Federal Reserve released its Flow of Funds (FoF) report Friday. The report showed Americans' net worth fell in Q2. Positively, households continued reducing debt levels and the real estate market stabilized, but (not surprisingly) these developments were more than countered by the stock market correction taking a bite out of portfolios. One worry is declining net worth could negatively affect consumer spending. But you wouldn't know it from the numbers. Consumption grew 2% annualized in Q2 (a decent showing). And whatever effect Q2's falling net worth may have on spending, it may also prove fleeting—US stocks are up about 9% since June 30th.
On a much brighter note, the FoF also showed non-financial companies remain very liquid, maintaining a massive $1.84 trillion in cash on their balance sheets—just shy of Q1's record (since 1952). You could interpret this negatively—firms must be conservative and little interested in investment. Yet there's no evidence of that. Business investment was up 24% annualized in Q2. And anecdotally, we see spending on tech improvements, M&A, and expansion continuing in Q3.
Johnson & Johnson said on Friday it's in negotiations to buy Dutch biotech company Crucell for $2.29 billion in cash. Oracle, the software giant, announced plans to up R&D spending to $4 billion this fiscal year from $3.3 billion last year. And it doesn't hurt that its earlier Sun Microsystems acquisition paid off well—Q1 profits jumped 20%, helped by hardware sales from Sun and increased demand for business software. Meanwhile, Texas Instruments Inc. added $7.5 million Thursday to the $1.3 billion authorized at the end of June for stock buybacks. And computer maker Dell Inc. is planning to spend at least $100 billion over a decade to open a second operations center in western China.
Companies can't hold onto the $1.84 trillion in cash forever, especially at today's rock bottom interest rates—shareholders looking for higher returns will insist something be done with the money. And that "something" is precisely what we're seeing now—corporate spending has consistently been the strongest driver of the last four quarters' of economic growth. Yet, amazingly, all that spending (and planned spending) hasn't done more than slightly dent the corporate cash hoard. There's more fuel in the tank—a lot more. And when spending trickle turns into a deluge, stocks and the economy should have reason to cheer.