Companies are Cash-Rich, U.S. Growth Outpaces China, Retail Sales Dip
In today’s Steady Investor, we focus on important factors that we believe are making an impact on the market today, such as:
- Corporations are sitting on record amounts of cash
- U.S. GDP growth surges past China
- Concerns of U.S. retail sales dip in July
Corporations are Sitting on Record Amounts of Cash – U.S. corporations have by and large been enjoying a strong 2021. Aggregate S&P 500 earnings are up close to 100% from Q2 2020, and companies are outperforming revenue expectations at a strong clip. Corporations are also sitting on a record amount of cash – data from Q2 2021 earnings reports shows a balance sheet with a record $6.84 trillion in cash and short-term investments, which marks a 45% increase from the average over the previous five years. At one point earlier in the year, many investors bet that cash-rich corporations would increase spending on technological upgrades, factories, and personnel as the vaccination rate moved higher and as pandemic risks waned. There is still some evidence CEOs are planning to invest cash – businesses like Tyson Foods, Morgan Stanley, and Constellation Brands have made statements recently citing their desire to spend on expanding research budgets, building factories, and boosting shareholder equity via share buybacks and dividend payments. With the Delta variant spreading quickly, some businesses appear – for now – to be pulling back slightly on their plans.1
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The U.S. Pulls Ahead of China in Growth – The U.S.’s GDP growth surge in Q2 outpaced China’s, and many economists expect the U.S. to edge out the second-largest economy in growth for the next few quarters. The U.S. expanded at a 12.2% pace in the second quarter compared to a year ago, while China posted a 7.9% gain. If the U.S. continues to grow at a faster pace than China for a few more quarters, it would be the first sustained period of outperformance since the 1990s. A few factors are driving faster U.S. growth in 2021. For one, the U.S. has a relatively high vaccination rate and an economy that largely has no economic restrictions related to the pandemic. In China, however, low vaccination rates and the appearance of the Delta variant have led the country to install drastic measures to stop the spread, in some cases locking down completely. The U.S. also poured more fiscal and monetary resources into the economic recovery than China did, which has played a role in the sharp growth rebound experienced in the first half of 2021.3
U.S. Retail Sales Dip in July. Cause for Concern? U.S. retail sales, which measure purchases at stores, restaurants, and online, fell 1.1% in July compared to June levels. If auto purchases are pulled from the figure – which has been a volatile category in 2021 – then sales declined a more modest 0.4%. Restaurants and bars saw a summer jump as consumers ventured back out, with sales rising 1.7% from June. The data suggests that consumers continue to shift spending away from big-ticket items and towards services, an expected outcome as restrictions fell away and people re-engaged with the physical economy. Market watchers will be looking to August numbers to measure if the economic impact of the Delta variant, which has to date led to a sharp drop in consumer sentiment as measured by University of Michigan data.4
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2 ZIM may amend or rescind the “Retirement Uncertainties…and How to Breeze Through Them” guide for any reason and at ZIM’s discretion.
3 Wall Street Journal. August 15, 2021. https://www.wsj.com/articles/u-s-economy-likely-to-outgrow-chinas-due-to-contrast-in-pandemic-responses-11629036000
4 Wall Street Journal. August 17, 2021. https://www.wsj.com/articles/us-economy-july-2021-retail-sales-delta-variant-11629153243
5 ZIM may amend or rescind the “Retirement Uncertainties…and How to Breeze Through Them” guide for any reason and at ZIM’s discretion.
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