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ORN THE HUSTINGS, both Donald Trump and Joe Biden have vowed to revive the US economy from its pandemic-induced funk. This will require a turnaround for US companies, which have experienced a wild downturn. When the White House occupier begins his four-year term in January, what state will American affairs be in?
Some recent vital signs may look promising. The US economy grew at a record rate of 33%, on an annualized basis, in the third quarter. Total profits for large companies S&P The 500 index exceeded analysts’ expectations by around a fifth, up 85% over the quarter’s forecast. Michael Wilson of Morgan Stanley, a bank, calculates the revenues by the median S&P 500 companies grew 1% year-on-year. Unsurprisingly, the Conference Board, a research organization, released a survey on Oct. 20, finding that its corporate boss confidence measure jumped to 64 from 45 in the previous quarter – a figure above 50 indicates responses. more positive than negative.
Still, anyone who tunes in to big company quarterly updates with Wall Street investors couldn’t help but catch the uncertain tone and frequent gloomy notes of executives. Visa, a payment company, for example, called the recovery “irregular”. Caterpillar, an industrial machinery manufacturer, admitted that it “holds more inventory than we normally would” due to the uncertainties arising from the pandemic. And a thorough analysis of the data suggests that the business recovery is very patchy, with some smaller industries and companies still in big trouble. Meanwhile, corporate balance sheets are under pressure, which could hold back investment and lead to an eventual rise in defaults.
The US economic boom in the last quarter would have been impressive had it not come in the wake of a similar decline in GDP in the previous three months. The economy remains 3.5% lower than at the end of 2019, the Conference Board estimates, and is not likely to return to its pre-pandemic level until late 2021 or possibly later (see chart). As for the large percentage of companies where profits exceeded expectations this quarter, Tobias Levkovich of Citi, a bank, is not impressed: “Beating lower earnings expectations isn’t that big of a feat.” It is now clear that analysts were too pessimistic when they penciled their predictions earlier in the year. He adds that many companies have managed to improve profits not by increasing sales but by cutting expenses. Business prospects remain “soft,” he says, as “you can’t cut costs to achieve prosperity.”
The more you look at the numbers, the more inconsistent the recovery will be. One source of differentiation is where a company’s customers are located. Jonathan Golub of Credit Suisse, another bank, estimates that the companies of the S&P 500 reported a 2.8% decline in aggregate revenue and a 10.2% decline in profits in the third quarter from the previous year. But he estimates that US export-focused companies plummeted by more than 14%, while companies most dependent on the domestic market fell by less than 9%.
Size is another lens that reveals the uneven shot. Deutsche Bank’s Binky Chadha argues that it is “a story of two stock markets”. The market capitalization of the five biggest tech giants (Facebook, Amazon, Apple, Microsoft and Alphabet) has declined in recent weeks from its peak by about a quarter of the entire value of the S&P 500 index. Even so, this year they generated a 39% return for shareholders and without them the other 495 produced a -1% return.
Small and medium-sized enterprises (SMEss) were crushed. The percentage of those who are taking losses, based on the Russell 2000, an index of SMEss – has slightly decreased from its peak above 40%, but remains well above 30%. SMEsThe odds of losing money are nearly four times higher than large corporations – a far worse situation than the 2001 recession or the global financial crisis ten years ago.
The atmosphere on the boards of small companies is bad. The latest investigation of executives on SMEss, published by Wall Street newspaper and Vistage, an executive coaching organization, found that sentiment “stalled in October 2020 due to growing concerns about an economic slowdown amid a resurgence of covid-19 infections.” The gloomy outlook, the most pessimistic of the last six years, can be explained by the fact that 42% of small businesses believe they will run out of liquidity in less than six months.
If one concern is the incongruity of the recovery, the other is the state of corporate balance sheets. Corporate debt was on the rise before the pandemic, and many companies accumulated additional loans to cover this year’s revenue shortfall. Edward Altman of NYU The Stern School of Business is concerned about what it calls “the huge backlog of corporate non-financial debt.” According to his estimate, companies have issued more than $ 360 billion of high-yield debt (i.e. junk bonds) so far this year, surpassing the previous record of $ 345 billion in all of 2012. With debt-to-earnings ratios that have reached critical levels, and a resurgence of corporate defaults, Altman calculates that 6.5% to 7% of junk bonds, by dollar value, will default in 2020.
His fears are echoed S&P Global, a credit rating agency. Calculate that the “distress ratio” (distressed loans are junk bonds with spreads of over ten percentage points over WE Treasuries) for US corporations had fallen to 9.5% in September from a peak of 36% in March, but remains above pre-pandemic levels. Corporate America is already the world leader in corporate defaults this year, with 127 by the end of October. Nicole Serino of S&P Global notes that corporate credit quality is deteriorating, with the number of companies rated low CCC+ or less now 50% higher than at the end of 2019. For such companies, he fears that “excess liquidity and low interest rates are just postponing the inevitable.”
With a large share of businesses continuing to suffer losses and given weaker balance sheets, it is by no means clear that American business is in the clear. What happens next depends on three unknowns. One is the fallout from this week’s presidential vote. A prolonged period of post-election uncertainty would weigh on mood, Levkovich notes. Indicates the 11% drop in S&P 500 index after the 2000 elections while legal disputes decided the outcome of the contest for the presidency between George W. Bush and Al Gore.
Another unknown is the timing and size of the next Congressional fiscal stimulus package, which is currently frozen by a partisan traffic jam in Washington. A.D, and that could be limited if Republicans retain control of the Senate. This is important for companies because, as Golub puts it, “the government has effectively stated,” We don’t want market forces to drive companies out of the market right now and so we will support much of the economy. ” Wilson believes the number of companies that have gone bankrupt so far this year has been far fewer than otherwise feared due to generous stimulus measures.
The biggest unknown, however, is the pandemic. Moody’s, a credit rating agency, predicts that corporate debt defaults will continue to rise through March 2021. The reason is that “the economic recovery remains fragile amidst the risks of another upsurge in the pandemic leading to another round of blocks nationwide “. This should serve as a sober reminder to the next president and business leaders that, despite a rebound, there may still be tough days to go. United States of America Inc.■
This article appeared in the Business section of the print edition with the title “Still sick”
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