CapEx is bad? A lesson in spurious correlation

Bloomberg has a blooper that ought to be taught in Economics 101 as a horrible example. It seems that the more companies spend on CapEx, the worse their stock performs.

Barclays’s chief equity strategist, Jonathan Glionna, said that the data should dispel concern that companies are forgoing projects that boost profits and stoke economic growth. Still, he said, it shows the market prefers other uses for money. “There’s plenty of capex spending and companies that spend more have generally been underperforming,” Glionna said via phone on April 2…

S&P 500 companies [have] been increasing capital expenditures every year since 2009 and spent $730 billion in 2014, the highest ever, according to Barclays, with companies like Chevron Corp. and AT&T Inc. investing more than $20 billion in the last year.

At the same time, companies in the benchmark index spent a sum equal to 95 percent of their earnings on repurchases and dividends in 2014, data compiled by S&P and Bloomberg show. That includes $553 billion of buybacks in 2014 and a total $1 trillion in the past two years, the biggest two-year sum in history, according to data going back to 1998.

“It may seem unjust that the equities of companies that make long-term capital investments in their businesses perform worse than the equities of companies that buy back their shares,” Glionna wrote in the report. “We do not see this trend changing.”

One problem with this analysis: CapEx has been weighted hugely to energy companies, whose stock prices underperformed because they spent their money on high-cost oil extraction, and the price of oil has collapsed. Tom Keene of Bloomberg news quoted a Reorient Group report showing that two-fifths of S&P CapEx went to energy last year. Take the energy effect out of the data, and the spurious correlation collapses.

from a Dec. 11, 2014 report by Reorient Group

from a Dec. 11, 2014 report by Reorient Group

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