Good morning. CFOs have been functioning in an uncertain economic environment for quite some time. But November’s U.S. presidential election adds another layer of uncertainty. This is causing finance chiefs to hold off on investments.
I had a conversation yesterday with John R. Graham, a professor of finance at Duke’s Fuqua School of Business. Since 1997, Graham has directed The CFO Survey. It's now conducted jointly with the Federal Reserve Banks of Richmond and Atlanta.
Nearly one-third of CFOs said their companies are postponing, scaling down, delaying, or permanently canceling investments due to the uncertainty about the upcoming election, according to a June survey. The survey is based on the responses of 477 finance chiefs at firms that range from small operations to Fortune 500 companies across all major industries.
Graham said it’s not unusual for CFOs to take a “let's just hold off a little while and see what happens” stance on investment during election cycles. However, he expects the percentage of CFOs who are pressing pausing would increase if asked in the September survey. “In this case, the two world views about international engagement are different enough that it's not easy to guess how international profits, just for example, will be taxed,” Graham said.
He offered the example of investing internationally. One administration says they're going to tax foreign profits, while the other one says "not so much," but it's still unsure exactly what that second administration would do, Graham said. “You might naturally say, ‘Well, let's not build that extra plant in the next six months,” he explained. “‘Let's wait and see how the election comes out, so we get a little more direction on whether to put the new factory in the U.S. or overseas.”
In Graham's own opinion, not based on his conversations with CFOs, he said the assassination attempt on former President Trump on July 13 adds more hesitation, at least in the short term. “We are all still processing exactly what happened and what the implications are, and it adds another layer of uncertainty,” he said. “Hopefully there will be no recurring events.”
Perhaps it will increase Trump's chances of getting reelected, and some may think that could actually start resolving a different kind of uncertainty, Graham said. “But I don't think that's happened yet,” he said. “We need to get through these conventions." We need to get to the other side of the Democratic convention to know if "President Joe Biden is definitely going to be the candidate," he said.
Graham also said that he thinks the economic and inflation trends, more so than election outcomes, are “probably going to drive the stock market more on any given day.” The dominant trend is still about whether inflation will come down enough to cut interest rates. “It seems like the market is thinking the answer to that is starting to be yes,” he said.
'Cautious in making decisions'
Graham's The CFO Survey is not the only report that CFOs are feeling cautious ahead of the election. RGP, a global consulting firm's latest report, Pulse on Workforce Strategy, found that almost a quarter of respondents said their organization is pausing some investments until after the presidential election. The data is based on a survey of 213 CFOs and finance leaders at the director level or above at U.S. companies earning from $50 million to more than $500 million in revenue.
Regarding the presidential election, "What we've seen in the last probably 12 to 18 months, at least, within our client base, is some uncertainty, myself included," Jenn Ryu, CFO at RGP told me in a conversation last week. "You're just cautious in making decisions, especially with respect to investment decisions," she added.
The firm is seeing some of its clients either pausing or delaying investments. But sometimes instead of committing to a multi-year project, they’ll do it in phases, she said. “I’m a CFO myself, and I’m doing the same thing.”
Sheryl Estrada
sheryl.estrada@fortune.com
