At this juncture, there’s something a bit redundant about documenting the disparity between consumer confidence and C-suite sentiment.
The disconnect between the mood among “regular” folks and those for whom the median annual household income is a rounding error has been the subject of intense scrutiny for months on end.
In October, we asked who is “wrong”, consumers or CEOs. A few months later, in December, we broached the subject anew, highlighting some charts from Nordea, whose Andreas Steno Larsen and Martin Enlund described the divergence between CEO expectations and equity markets as “stunning”.
On Thursday, this extreme example of cognitive dissonance was thrown into stark relief again, courtesy of Bloomberg’s Consumer Comfort gauge, which rose to a 19-year high, and a smattering of articles outlining the findings from the latest Deloitte CFO Signals Survey, which was conducted in November, but is apparently just now making the media rounds.
“Expectations for a US downturn have risen since [early 2019], with 97% of CFOs saying that a downturn (a slowdown or a recession) has already begun or will occur by the end of 2020 — well up from 88% in 1Q19,” the survey reads. “Overall, 12% of CFOs say they believe a downturn has already commenced, and 14% say they already see signs of a downturn in their company’s operations”.
In explaining their outlook, CFOs cited falling expectations for consumer and business spending, and two-thirds remarked that performance beyond this year will depend heavily on the US election.
That underscores one of the main themes that pervades all the commentary written on this subject – uncertainty in the C-suite is extremely high thanks not only to the election (which, in a “worst” case scenario, could raise fears that the corporate tax cuts will be repealed), but also due to rising labor costs, the trade war and the prospect that the political tide is turning against buybacks.
Almost none of those things matter to regular folks – or at least not until companies start laying them off due to an inability to plan for the longer-term in the face of so many gale force headwinds.
“Compared to early 2019, companies appear to be taking more defensive actions related to downturn expectations — particularly around reducing spending and limiting or reducing headcount”, Sanford Cockrell III, national managing partner of the CFO program at Deloitte remarked, on the way to delivering the good news, which is that “while CFOs expect some form of US downturn by the end of 2020… expectations of a full-blown recession have fallen sharply since 1Q19”.
You won’t be surprised to learn that the folks in charge of managing the balance sheet find debt to be very attractive as a financing option. In fact, debt attractiveness rose to 87% in Q3 and sat at 86% in Q4. That, Deloitte notes, is “the second-highest level since Q316”.
Little wonder. After all, high grade spreads are sitting at 22-month lows. Investment grade credit is coming off a blockbuster year that found IG returning nearly 14% for investors, amid a voracious hunt for yield. All of this goes hand-in-hand – demand begs for supply, and until it’s sated, the market’s appetite pushes yields lower, compresses spreads and drives performance for corporate credit in a world where safe-haven government bonds outside of the US yield less than zero.
Amusingly, 77% of CFOs now say US equity markets are overvalued. That’s up sharply from 63% in Q3, and the highest level in nearly two years.
Why is that amusing, you ask? Well, because CFOs might well look to the woman/man in the mirror and also at that debt “attractiveness” score in explaining why stocks are so “overvalued”.
After all, the corporate bid is the largest source of demand for US equities, and it’s no secret that debt issuance is one of the main drivers of buybacks.
Deloitte goes on to say that “only 17% of CFOs expect the fed funds rate to be higher than the current rate (1.5%) at the end of 2020, and just 5% expect to see negative rates by end of the year”.
In essence, that’s just another way of saying that CFOs harbor a downbeat view on the economy, but don’t expect an outright recession.
If some of this sounds overtly negative to you, don’t worry, because when the very same CFOs who overwhelmingly said a US downturn or recession is either already here or coming in 2020 where asked whether they expect the US economy to improve this year, 30% of them said yes.
Deloitte suggests that’s somehow consistent.
“30% of CFOs expect the US economy to improve in 2020, up from a year ago, but only about half the level entering 2017 and 2018”, the survey says, before explaining that “findings from page 14 suggest the vast majority of CFOs expecting improvement anticipate slower growth than in 2019”.
Page 14 is where you’ll find 97% of respondents predicting a slowdown or recession. Page 13 is where you’ll see the same people predicting improvement.
You can sort all of this out for yourself in the full report, presented for your approval below.
Via DeloitteCFO Signals 4Q19 - High-Level Report