As economic and capital market forecasters here at LPL Research we regularly concern ourselves with issues that could create shocks to the global economic and capital market system.  In this latest edition of LPL Street View, LPL Financial Director of Research Marc Zabicki looks at two of those issues: current U.S. corporate credit levels and U.S. corporate cash flow. Both can offer some insight to the vulnerability in the system, especially as recession risks have ticked up of late.

During times of some irrational exuberance, steep debt increases without a corresponding increase in corporate cash flow have historically caused an economic fallout that presented downside shocks to asset prices.  This was most recently seen during the economic and market downturns of the early 2000’s and the Great Financial Crisis of 2007-2008. 

In recent years, the overall lift in credit can be a bit concerning when it comes to gauging the potential for market and economic shocks as a result of excessive debt in the system.

The good news is that corporate America’s ability to generate cash to service that debt is in the best shape it has been in years.  Current low levels of this debt to EBITDA ratio contrasts with more unstable periods of past years.  This highlights the relatively healthy nature of current U.S. corporate balance sheets, a condition that may allow U.S. companies to better handle a potential economic shock or a simple economic downturn.  We believe U.S. corporations are on better-footing than they have been in some time.

While we are always cautious of rising debt levels in the economic system, this most recent lift in debt has occurred in conjunction with increasing levels of cash generation.  We believe this reduces that likelihood of an economic shock and could help offset the risk that any near-term recession becomes deep or long-lasting.

 

IMPORTANT DISCLOSURES

This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors or will yield positive outcomes. Investing involves risks including possible loss of principal. Any economic forecasts set forth in the podcast may not develop as predicted and are subject to change.

References to markets, asset classes, and sectors are generally regarding the corresponding market index. All indexes are unmanaged and cannot be invested into directly. Index performance is not indicative of the performance of any investment and do not reflect fees, expenses, or sales charges. All performance referenced is historical and is no guarantee of future results.

Any company names noted herein are for educational purposes only and not an indication of trading intent or a solicitation of their products or services. LPL Financial doesn’t provide research on individual equities. All information is believed to be from reliable sources; however, LPL Financial makes no representation as to its completeness or accuracy.

All index data is from FactSet.

The Standard & Poor’s 500 Index is a capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.

All information is believed to be from reliable sources; however, LPL Financial makes no representation as to its completeness or accuracy.

This Research material was prepared by LPL Financial, LLC. 

Member FINRA/SIPC

For Public Use — Tracking #1-05321443