October 24th, 2011
The Bright Spots Most Headlines Miss
I recently attended a round table discussion between chief investment officers and senior economists from three significant financial institutions, who have purview over billions of dollars in client assets. There were several key points of interest to participants in the building products industry.
One of the economists keeps a careful eye on the tie between investor sentiment and retail sales. He found in the past that the same signal sent by investor confidence was sent by consumers’ willingness to spend money on goods. These two factors tracked one another closely through 2008 and then diverged. Currently, investor sentiment is relatively low and would indicate, if that past relationship had held, that retail sales should be down 2 percent year-over-year. However, retail sales are up 6 percent year-over-year. This means that the currently negative investor sentiment is not borne out by current retail spending and conditions in the overall economy may be better than would initially appear to be the case.
Another very interesting point was shared by my fellow attendees at the conference and was also echoed by two of the speakers. There is a prevailing sentiment in the United States right now, when talking to owners of middle market companies, that they are optimistic about their own business but pessimistic about general prevailing conditions. I’ve had similar conversations with owners of door and window companies. No one with whom I’ve spoken is as worried about their own business as they are about the overall economy. That is the kind of sentiment imbalance that has a way of working itself out for the better.
Corporations in the United States are currently holding record levels of cash. There is a general sense that corporations are taking a “wait and see” approach to investing further in this country. There is too much uncertainty with respect to potential tax and regulatory changes and the possibility of a changing administration in Washington. Investments that are on hold include hiring and spending money on infrastructure, technology and research and development. Needless to say, these are some of the very engines of economic growth that are needed to return to prosperity. One of the primary factors encouraging investment that is followed by one of the economists at the conference is the spread between profitability and cost of capital, which is currently very large. In other words, companies have access to cheap capital and can earn ample returns on it by investing in their own businesses. This kind of situation cannot persist indefinitely and investment will have to increase. Overall, the market is still challenging but there are positive underpinnings that will form the basis of the recovery.