Based on recent Thomson Reuters data, corporations around the globe hold a record $7 trillion worth of cash on their balance sheets. This has to be bullish for stocks, right? Not necessarily. Here’s everything you’ll ever need to know about the effect of corporate cash piles on stocks.
Reuters just reported that companies around the world hold almost $7 trillion of cash and cash equivalents on their balance sheets.
The Federal Reserve pumped about $3 trillion into the U.S. economy. This has propelled the S&P 500 ETF (NYSEArca: SPY) by over 175%. Should we imagine what $7 trillion could do?
Let’s take a look at some basic numbers and concepts before we start drooling over the potential stock market profits.
Corporate Cash 101
It is somewhat difficult to find coherent corporate cash figures that allow consistent charting and tracking. Most estimates exclude financial corporations (NYSEArca: XLF), other don’t. Some estimates are limited to domestic cash piles, other are global.
The analysis provided here is based on data from the Federal Reserve for non-farm and non-financial companies.
Based on the latest available data, non-financial U.S. corporations had caches worth $1.76 trillion. As figure 1 illustrates, this is the highest corporate cash pile in history.
Two Sides of the Balance Sheet
However, there are two sides to the balance sheet: Assets and liabilities. Wherever there are assets, there are also liabilities.
Figure 2 shows that corporate liabilities have grown along with the assets. The data suggests that a fair portion of the corporate cash pile is mortgages by liabilities.
Figure 3 pegs the difference between U.S. non-financial corporate assets and liabilities – U.S. corporate net worth – at $1.1 trillion.
The ‘Corporate 1%’
According to the Financial Times (which analyzed the S&P Global 1200 Index), 32% of corporations hold 82% of the aggregate global cash hoard.
Figure 4 shows the top 5 cash richest corporations of 2013. Apple, Microsoft, Google, Verizon, Samsung.
Effect of Corporate Cash on Stocks
Basic logic suggests that corporate cash – if invested – is bullish for the economy and, by extension, major stock indexes like the S&P 500 and Dow Jones (NYSEArca: DIA).
Figure 5 plots the S&P 500 (SNP: ^GSPC) against U.S. corporate ‘net worth.’
The correlation between corporate ‘net worth’ and S&P 500 peaks contradict the assumption that corporate wealth is good for stocks.
The red lines show that major S&P 500 peaks coincided with prior, albeit smaller, corporate cash stockpiles.
Corporations have more money because they are paying less taxes despite record profits.
‘Legal’ tax evasion has become one of the biggest contributors to the growing cash pile.
Here’s how companies do it and how many billions they save (or cost Uncle Sam):
Simon Maierhofer is the publisher of the Profit Radar Report. The Profit Radar Report presents complex market analysis (stocks, gold, silver, euro and bonds) in an easy format. Technical analysis, sentiment indicators, seasonal patterns and common sense are all wrapped up into two or more easy-to-read weekly updates. All Profit Radar Report recommendations resulted in a 59.51% net gain in 2013.