Sep 5, 2019

Recession fears are making companies more responsible

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Fears of a global recession are scaring U.S. companies, pushing them to use excess capital to reduce debt and add to cash reserves, rather than levering up and making risky bets as they have in the past.

Why it matters: This newfound corporate responsibility, motivated largely by fear, could help insulate the economy from another damaging recession.

Driving the news: A "floodgate" of $25.5 billion of investment grade corporate debt unrolled yesterday, representing the highest number of issuers and the second highest amount of debt ever issued in a single day, according to Bank of America Merrill Lynch data.

  • The recent bond rush has been led by Apple, Deere and Disney, which each issued 30-year bonds with yields below 3%, a first for the corporate bond market
  • The record low yield on long-term U.S. Treasuries has companies bringing new debt to market, particularly well-known companies that can price bonds with historically low interest rates.

Between the lines: The difference between Wednesday and previous high issue days is many companies are using the new issues to refinance existing debt rather than make new purchases or spend, BAML notes.

  • "The bond boom is the corporate version of the refinancing rush that hit the mortgage market last month as homeowners moved to lock in cheaper loans," per WSJ.

Details: The investment bank's data also shows S&P 500 companies, especially in tech, have slowed the pace of stock buybacks this year, with share repurchases in the third quarter down 12% year over year so far.

  • The kind of profligate spending that was prominent ahead of the global financial crisis has been pared back significantly in recent months, with companies preparing for the economy to slow, Bernard Baumohl, chief global economist at the Economic Outlook Group, told Axios in August.

Don't forget: The Business Roundtable, an association of CEOs from the biggest companies in the U.S., recently issued a statement on “the purpose of a corporation,” arguing that companies should no longer advance only the interests of shareholders. Rather, they must also invest in their employees, protect the environment, and deal fairly and ethically with their suppliers.

The bottom line: The combination of lower debt, higher cash balances and less risky investments may not be exciting news for the stock market, but could well give the U.S. economy another leg to stand on in the face of rising global uncertainty and weakening growth.

Go deeper: Markets provide an unambiguous signal that investors expect recession

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The biggest week for bond sales on record had perfect timing

Illustration: Rebecca Zisser/Axios

U.S. companies issued $74 billion of investment-grade bonds this week, between Tuesday and Thursday, the most for any comparable period since records began in 1972, Bloomberg reported on Thursday. That nearly doubled the previous record of $40 billion set in 2013.

What happened: Issuers were able to sell into a historically thirsty market, with 30-year bonds from companies like Disney, Deere and Apple carrying record low coupons, and investment-grade bond yields dropping to a 3-year low of 2.77%.

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The stock market is overreacting

Stocks took a nosedive for the 2nd consecutive day on Wednesday and the Dow and S&P fell for the 4th time in 5 sessions. But the U.S. Treasury market experienced a far smaller move, as it has been factoring in manufacturing weakness and slowing job growth for months.

Why it matters: The bond market's limited movement in the face of historically weak manufacturing and deteriorating employment data suggests the worst may be over, analysts say.

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The bears are in control now

Illustration: Aïda Amer/Axios

For much of the year, equity bulls bought stocks on even the faintest hint of good news about companies or the economy, pushing U.S. indexes to new all-time highs despite a slowing economy and negligible earnings growth.

Why it matters: But with the S&P 500 approaching 20% gains for the year and no real signs of growth to be found, a spirit of pessimism and increased caution looks to be gripping the market.

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