Having recently passed the seven-year anniversary of the post-crisis stock market bottom, a lot of investors, economists, and market watchers are asking: what’s next?
Recession fears, concerns about China, and the extreme bearishness of investors all seemed to be aimed at answering the question of what’s on the horizon.
But the thing is: even asking the question means that everyone knows the market is shifting and the current business cycle has come to an end.
The end of the business cycle
In the wake of the financial crisis
As Barclays’ Jonathan Glionna pointed out in a recent note, increased buybacks have pushed spending by companies beyond their cash flow meaning debt is bring used to finance expenditures.
This typically happens at the end of a cycle, said Glionna, as financing conditions eventually tighten thus preventing companies from relying on debt and buybacks to drive earnings per share growth.
A shift for better or worse
From here it appears there are two options, one positive and one not so much.
The first option is that the cycle, in a sense, resets itself. This case was outlined by Omar Aguilar, Chief Investment Officer for Equities at Charles Schwab Investment Management.
Aguilar is of the opinion that we “haven’t seen the top in capex” and as the stock market becomes more volatile, companies will choose to deploy their record levels of cash on long-term capital as it becomes the only logical investment.
“A lot of companies are very rich in terms of cash on the balance sheet,” Aguilar told Business Insider. “We may not see growth like we have in previous cycles, but companies have to deploy that cash somehow and that will most likely be in capex.”
In turn, with little slack left in the labour market and wages finally increasing, more of corporate profits would go to labour leading to a boon for workers. In fact, this shift to labour is already happening in a sense as labour’s share of corporate profits has ticked up in recent months.
A new investment cycle could drive the economy forward, creating an ever longer growth period according to Aguilar, and flip the way businesses spend to labour over shareholders.
The fear, however, is tighter financing conditions will lead companies to get defensive rather than invest, curtailing economic activity and leading to a recession. Aguilar shares this worry and says a lack of capex would be a huge danger to future economic growth.
“If companies decide to play defensive and not increase capital expenditures, that means danger for the economy,” said Aguilar. “If companies get defensive, consumers get defensive and you see a decrease in spending across the board. That is the biggest risk towards the downside of a recession.”
Either way, businesses spending habits are shifting and whether this is a boon for workers and the economy remains to be seen. So, at this point at least, the only answer for “what’s next?” may simply be: change.