Aggregate Corporate Savings, Economic Uncertainty and Future Stock Returns

I find both U.S. and international evidence that aggregate corporate cash savings strongly negatively predict future excess market returns. In the U.S. stock market, market timing based on aggregate cash savings yields annual returns 2.55% higher than an all-equity-all-the-time strategy. The strong negative correlation between cash changes and future returns holds at the firm level, and aggregates to the portfolio and economy levels. I provide theoretical and empirical evidence that the time variation in risk premia arising from economic uncertainty at least in part drives the predictive power of cash savings. These findings also shed light on the puzzling positive correlation between accruals and future returns in the aggregate: after controlling for aggregate cash savings and aggregate capital investment, aggregate accruals have a near-zero relation with future market returns