Business Spending Should Rise

Posted in: Economics, General, Stock Market, Thought of the Week

The financial crisis of 2008 taught many companies that they need to reduce debt and cut their costs; therefore, causing hesitation by many companies to invest in new growth opportunities. This has led to a record amount of cash sitting on balance sheets. These large cash balances have earned no interest.So management made the decision to give the cash back to shareholders in the form of dividend raises and stock buybacks.

As we enter the New Year, there appears to be a developing shift in the use of cash from share-friendly activities to investment in future earnings growth. We are encouraged to see this newfound interest in business spending for three key reasons:

  1. Investing in Growth: Our economy is improving and the risk to invest in capital expenditure projects is far lower than five years ago. Companies must once again begin “spending money to make money.”
  2. Boost to Economy: Businesses tend to lag consumer spending in a recovery, and a rise in capital expenditures will further add to our gross domestic product (GDP).
  3. Equities Have Risen: Given the rise in equities over the past three years, buying back stock cheap is more difficult to achieve. Therefore, companies are looking for a better use of their capital.

Investment into future growth is not only beneficial to our society but also to the returns for long-term investors. Cash currently generates a negative return once inflation is considered, and that is why our Investment Committee likes to see the cash being used towards new capital expenditures.

Read this week’s Thought of the Week to learn more about how companies spend their capital and how it can benefit our economy in the future.

Click Here for the Weekly Thought

As an Investment Advisory Representative working in conjunction with Global Financial Private Capital (GFPC) we are provided weekly thoughts on what is happening in the economy and the market. Written by our investment committee at GFPC we find these thoughts to be informative and interesting.