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Chinese equities. Coal. Emerging market equities. Gold. U.S. Treasuries. U.S. high-yield bonds. They have all joined the joyless parade of assets gone bad or threatening to go that way. By contrast, American equities lead the shrinking procession of assets still performing reasonably well. June employment numbers, released on Friday, beat expectations too. That is both good and bad for the U.S. stock market.
The data – widely watched but notorious for being revised – indicate an improving economy. But that raises the odds that the Federal Reserve's bond purchases will be scaled back. As a direct and liquid play on the world's least frightening major economy, investors need U.S. stocks to keep marching.
A good moment, then, to check on the health of the American company. The Fed constructs, from a variety of sources, quarterly aggregate cash flow and balance sheet figures for U.S. corporations. Some of the data are quite encouraging. At the end of the first quarter, cash flows after taxes but before dividends at U.S. non-financial corporations were running at an annualised rate of about $1.9-trillion. That is roughly even with the same quarter in 2012, but a quarter higher than the pre-crisis peaks of 2006 and 2007. Lower taxes have helped a bit, but the underlying profitability of U.S. companies is undoubtedly strong.
Looking at what companies have done with their cash is a little less reassuring. The amount sent out as dividends has been more or less stable on a net basis since 2007, despite the profit growth. Similarly, the amount spent on buybacks and on the shares of acquired companies has not reached pre-crisis heights.
Surely, then, U.S. companies must have cleaned up their balance sheets – making their shares all the more appealing as safe havens? No, unfortunately. By standard measures, U.S. non-financial companies have not significantly reduced their aggregate debt burdens since 2007. The net debt-to-cash flow ratio has gone from 3.7 to 3.6. Debt-to-equity ratios are unchanged. Where all the incremental cash flow is going is a tricky question.