Brutal cost-cutting measures and mass firings by American companies following the recession were supposed to have a silver lining: Balance sheets flush with cash. And indeed, corporations were sitting on a record $1.8 trillion as of the end of March, according to recent data. The thinking went that cash-rich companies could help kick-start the next leg of the economic recovery by spending and boosting demand, according to some analysts.
But a growing number of companies now seem to be returning the money to shareholders rather than spending it. Last week, 27 companies said they would spend $18.5 billion on buybacks, the highest total since February. And news elsewhere is lackluster as well. A growing number of companies are warning that future earnings will be lower than expected, and several gauges of economic activity also came in weak.
Strong Stock Market, Weak Economy?
With consumers still reeling amid soaring unemployment, cash-rich corporations were seen as one of the few catalysts for shoring up demand. But some companies now seem more intent on returning capital for shareholders -- and let them decide where to spend it -- than investing it themselves.
That isn't without its upsides, either. Buybacks indicate that companies have some measure of confidence in economic conditions and are willing to part with funds rather than hoard them. And eliminating shares boosts relative earnings and could prop up stock prices in the near term.
But more bullish camps had hoped that corporate spending could pick up the slack for a bruised consumer and stretched government at this stage of the economic recovery. The irony is that if more companies start returning capital to investors rather than deploying it, the result could be a relatively strong stock market -- even as the general economy continues to limp along.
Learn the most important step in structuring an investment portfolio.View Course »