There’s good news and there’s bad news.
We’ll assume you want the good news first.
The good news is, real-life “plunge protection” in the form of buybacks is alive and well in 2019. According to Goldman’s repurchase desk, executions jumped 26% through mid-July. Despite the run rate of authorizations falling by a fifth versus the comparable period in 2018, spare capacity under existing multi-year authorizations leaves the door wide open, and on Goldman’s estimates, “S&P 500 buybacks will climb by 13% to a new all-time high of $940 billion this year”.
(Goldman)
In an environment where market depth is still relatively impaired and liquidity thin, the corporate bid can be even more powerful when it comes to driving up equities and protecting the downside during periods of duress, which have been relatively sparse in 2019 anyway.
That’s the good news. The bad news is, corporate cash balances are hemorrhaging the most in at least four decades.
As Goldman goes on to write in a Friday evening note, corporates are handing more cash back to shareholders than they’re generating in free cash flow for the first time since the crisis. “During 2017, non-Financial S&P 500 firms returned 82% of free cash flow to shareholders in the form of buybacks (net of equity issuance) and dividends compared to 104% during the 12 months ending 1Q 2019”, the bank says, adding that “net buybacks and dividends surged by 30% during the past 12 months while free cash flow increased by a comparably modest 10%”.
Naturally, this means management is dipping into cash balances to finance spending – and “big league”, to quote the president.
“The $272 billion trailing 12-month decline in non-Financial cash balances represents the largest percentage decline since at least 1980 (-15%)”, Goldman writes, on the way to observing that “as a percentage of assets, non-Financial cash balances have declined from 12.7% in June 2018 to 10.4% today — the lowest level since March 2010”.
(Goldman)
As you might imagine, this rather dramatic decline in cash balances has been accompanied by higher leverage.
Net debt / EBITDA for the median non-Financial S&P 500 stock has hit a new record high after falling for most of 2017 and 2018, and while some of that is due to plunging cash balances, you’ll note from the visual above that gross debt outstanding is up 8% during the past 12 months”.
So, if spending levels are to be sustained, we’re gonna need more earnings growth and/or more tax cuts – tenuous propositions, to be sure.
