Daily Insight

U.S. stocks extended the latest winning streak to four sessions on talk of more acquisitions to come, Qualcomm’s announcement that they’ll begin a $3 billion stock buyback program and increase the dividend, and Indian manufacturing remained in expansion mode for an 11th straight month.

Companies are sitting on record levels of cash, roughly $1.18 trillion for S&P 500 members, and early signs suggest they’ll deploy that cash in a manner that boosts returns for shareholders via buybacks and dividend hikes. (S&P 500 members’ cash levels jumped $518 billion over the past year after slashing capital spending by 43%. Excluding financials, corporate cash stands at $820 billion, up 27% over the past year.)

Firms see the environment as challenging and are not confident profits alone are going to drive share prices higher. Certainly, dividend payouts will need to increase as the coming tax-rate hikes on dividend income will erode after-tax returns. The two plans being pushed: hike the dividend-income tax rate from the current 15% to 22.9% (20% + 2.9% Medicare tax) or drive the rate to the investor’s marginal tax rate – the former having the most support.

Of course, if profit growth does not become durable then this strategy becomes a negative for job growth. Firms will not spend cash on both areas unless the revenue and income is there to support it. They’ll continue to seek profit-enhancing productivity gains via reduced payrolls.

The Dow average was held back by the index’s tech names -- IBM, Microsoft and Hewlett-Packard.

Along with information technology, telecom and consumer discretionary shares were the three of the major 10 sectors to lose ground on the session. Basic material, energy and utility shares handily out-performed the market.
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Brent Vondera, Senior Analyst