Corporate cash levels are plummeting

Corporate cash levels are plummeting

US recession risks continue to rise. Over the past few months, we’ve been shifting our client asset allocation to minimize global equity exposure (stocks) and maximize fixed income (bonds) allocation. This has served our clients well with bond prices increasing as global economic growth continues to slow. Furthermore, stocks have gyrated but haven’t moved up much since January 2018. We continue to believe that conservative positioning with the primary goal of capital preservation is key at this point in the economic cycle.

BCA Research’s Chief Equity Strategist recently shared a couple of charts that further underpin our view that we are at a turning point in economic activity that will translate into a bear market for global equities. These include:

1) Companies in the S&P 500 (excluding financials) are burning cash at the fastest pace since before the 1990-1991 recession, down 15% year-over-year (y-y) as of July 25, 2019. Furthermore, debt levels are up 8% y-y. This does not bode well for corporate balance sheets and speaks to declining cash flow growth.

S&P 500 companies are bleeding cash

Source: BCA Research

2) US consumers have leveraged up again. US consumers deleveraged significantly between 2008-2013. However, that has been reversed. Even with record low interest rates, real personal interest payments have increased 50% in the past six years. Increases in payments of this magnitude have corresponded with past peaks in the business cycle as shown below by the red vertical lines. If US consumers are stretched (even with low interest rates), consumer spending will be constrained, thereby negatively impacting economic activity and corporate profitability.

Source: The Leuthold Group