Like most people, my economic instincts and financial acumen are drawn from experience, which means I’m forever expecting markets to behave like they have done in the past, and I’m never prepared for market ‘surprises.’ This makes me a reasonably good index-fund investor, and not much more. Markets, I remind myself, are perfectly rational reactions to the irrational behavior by the millions of people comprising them.
The experience of the past eight years, since global financial markets collapsed in 2008, has made market skepticism something of a default position for businesses: having been scorched then, they have altered their exposure to risky financial positions and long-term obligations. They lease or subcontract rather than buy; they employ fewer people and hire part-time or temporary workers, when possible; and they hoard cash rather than pay dividends to investors.
In a twist, they will borrow money in order to buy their own stock, again to reduce risk, and they can do this because interest rates have been kept so remarkably low for so long. Why are interest rates low? Because economic growth has been so tepid that the Federal Reserve Bank would like to stimulate business investment, thinking investment will stimulate business expansion and that in turn will prompt new-job creation.
If you take a simple market-based analysis of this, you’ll agree that there is something of a role-reversal here: the regulating authority (the Fed) is prolonging risk in the expectation of growth, while the market players (businesses) are pursuing the safe and self-guarding strategy of building equity. There is a lot more than this going on, to be sure — federal and state regulations distort the cost of hiring workers beyond the workers’ marginal value; financial disclosure and reporting regulations reduce the value of issuing stock; federal and state regulations escalate the cost of new project development; and much more — but the overriding point is that eight years after a historic collapse the U.S. economy cannot achieve any normal standard of economic growth because the capital markets are out of balance. And this is not because too many reckless investors are distorting valuations but because the policies set by financial overseers promote such extraordinary discipline.
When will this market adjust? Not soon, if we can believe a new survey of Fortune 1000 business executives conducted by Deloitte, a business consultancy.
Global macroeconomic factors are guiding large U.S. businesses’ investment plans, prompting them to reemphasize their cost-improvement priorities and strategies, according to the research. While the U.S. economy has not demonstrated expansive growth in the past few years, individual companies have grown significantly stronger. The stock markets have rewarded them with higher share prices, and often these gains have accrued directly to the businesses because of the stock-purchase strategies. However, other parts of the global economy are struggling or even regressing, which is depressing the financial prospects for larger corporations and multinationals, which rely more than small and mid-sized firms on foreign markets.
Deloitte calls the conflicting economic prospects “a paradox in which many U.S. companies are simultaneously pursuing aggressive growth and aggressive cost improvement.” The eye-catching figure: 88% of executives responding to the survey will pursue corporate cost reductions over the next 24 months, regardless of company performance. Lower international consumer demand and foreign exchange volatility are their motivators.
The spending these large corporations will not be doing will be revenues that are not recorded by midsized and smaller businesses, companies like metalcasters that produce semi-finished parts for OEMs to install in equipment sold globally. The buyers’ risks will have been reduced, and so of course will be the suppliers’ opportunities.
The prospect of a global market has spooked U.S. manufacturers for three decades, but they have responded rationally to that market: They have adopted better production standards and learned to deliver parts and materials of much higher quality. If this were the end of the competition, the U.S. manufacturers would be declared the winners of the global competition. But markets don’t end, they adjust, and the last adjustment imbued U.S. businesses with an extraordinary aversion to risk. What would be a rational response now?