1. The looming debt crisis: A staggering $6.3 trillion issue that could lead us into the next recession.
The previous economic downturn was sparked by excessive debt levels among both Wall Street and American consumers, especially within the booming housing sector.
Fast forward a decade, and now it’s Corporate America that’s borrowing extensively. Encouraged by record-low interest rates, U.S. corporations have amassed an unprecedented $6.3 trillion in debt, as reported by S&P Global Ratings.
Currently, this debt may seem manageable. Default rates are remarkably low, and companies have ample cash reserves, benefiting from a robust U.S. economy and tax cuts for corporations.
However, as economic growth and corporate profits inevitably decelerate, companies will find themselves with reduced capability to service their debts. Refinancing maturing debts may also become a challenge, particularly if borrowing costs rise as a result of the Federal Reserve’s rate hikes.
If firms encounter a credit crunch, reductions in hiring and capital investment could ensue, potentially paving the way for another recession.
“The next recession will not be instigated by consumers or banks, but by corporate entities,” noted Michael Hartnett, Bank of America Merrill Lynch’s chief investment strategist, in a recent message to clients.
This corporate debt surge has played a significant role in sustaining the recovery, with interest taken towards investment in factories, equipment, and product development, alongside significant amounts designated for stock buybacks that benefit Wall Street.
Over the past ten years of low interest rates, companies have accumulated debt at an unprecedented pace relative to the economy. Business debt as a share of GDP has reached an all-time high, as highlighted by David Ader from Informa Financial Intelligence.
Furthermore, the most vulnerable borrowers are more leveraged than ever, with corporations rated as junk currently holding an astonishing $8 in debt for every $1 in cash, according to S&P.
Additionally, a category of so-called ‘zombie companies’ exists — those unable to cover their interest costs despite the favorable economic environment and low interest rates.
According to Ben Breitholtz, a data scientist at Bianco Research, 14% of companies within the S&P 1500 don’t generate enough earnings before interest and taxes to service their interest costs, surpassing the global average of 10%.
These zombie firms are likely apprehensive as central banks gradually wind down the era of easy money. The Federal Reserve is anticipated to raise rates on Wednesday, marking its eighth increase since late 2015, with four additional hikes expected before 2019 concludes.
Simultaneously, the Fed is reducing its $4.5 trillion balance sheet — a strategy that may lead to increased borrowing expenses as international central banks follow suit and offload bonds.
Bank of America’s Hartnett cautions that a “hawkish” Federal Reserve in 2019 could initiate a “credit crunch,” not only in emerging markets but also affecting Corporate America.
2. Trade tensions: The U.S.-China standoff is set to escalate on Monday with the introduction of tariffs on $200 billion of Chinese imports, while China has promised a corresponding tariff on $60 billion of U.S. goods.
The ongoing trade war poses challenges for numerous companies, including Walmart and Procter & Gamble, due to their reliance on imported Chinese products or Chinese goods within their supply chains.
3. Nike’s earnings: We will discover Nike executives’ insights regarding the feedback to their Colin Kaepernick advertisement on Tuesday when the company reveals its earnings.
Nike has had a successful year, with U.S. sales showing improvement and stock prices increasing by 35%.
4. Economic indicators: The final report on the U.S.’s economic growth for the second quarter will be released on Thursday. The previous report indicated a strong growth rate of 4.2%.
5. Upcoming events:
Monday — U.S. institutes tariffs on $200 billion worth of Chinese goods; MacOS Mojave launches.
Tuesday — KB Home (KBH) and Nike (NKE) earnings; U.S. consumer confidence report.
Wednesday — Earnings reports from Bed Bath & Beyond and Carmax; Federal Reserve interest rate announcement; U.S. new home sales figures for August.
Thursday — Earnings from Rite Aid, Carnival, and Accenture; final revision of U.S. second-quarter GDP.
Friday — Conclusion of Q3.
UJ (New York)
First published September 23, 2018: 7:40 AM ET
