The 2020 stock market recovery should not be surprising given the V-shaped recovery in corporate profits, which are now higher than they were at the end of 2019 (h/t @lhamtil).
Thread on what drove this, using sectoral balances & Levy-Kalecki 👇
1/
Levy-Kalecki profit equation recap:
Corporate Profits =
Investment
+ Dividends
- Household Saving
- Government Saving
+ Current Account Surplus
Business investment & current account surpluses are profit sources.
Household & government savings subtract from profits.
2/
I used BEA's NIPA tables to compare corporate profits (collected directly) vs calculation using the profit equation.
Not a perfect match as the first chart shows.
But you get an exact match by subtracting a discrepancy term (from BEA) to account for data collection errors.
3/
So here's cumulative growth of corporate profits & profit sources from 1993-2020 Q3.
You see big shifts, especially in household (blue) & government savings (orange) post-2008.
And 2020 Q2/Q3 are off the charts - more on this below.
4/
Focusing on 2020 Q1-Q3 cumulative growth.
We see huge increases in household savings (blue bars) & dropoff in investment spending (green) - both subtracting from profits.
But profits completely recovered (+$28B ytd) - thanks to negative govt savings i.e. deficits (orange).
5/
Extending back a little further ...
Since 2016, profits are up $442B.
This is almost entirely on the back of fiscal deficits, which has made up for
On the topic of the stock market vs the real economy, there's lot of information once you disaggregate the "stock market", as @NathanTankus pointed out.
Here's avg YTD returns for S&P 500 companies disaggregated by sales growth
Sales >20% y/y: +23% ytd
Sales <-20% y/y: -24%
1/
Another simple disaggregation is by market cap.
Again, a wide dispersion, which wasn't the case back in February.
Avg. YTD returns for Market Cap > $200 Bil
As of 2/19: +8%
As of 8/21: +19%
Avg. YTD returns for Market Cap < $25 Bil
As of 2/19: +0.5%
As of 8/21: -14%
2/
Here's the distribution of YTD returns of S&P 500 companies, as of 8/21/20 compared to 2/19/20.
Percent of companies with YTD returns < -25% -
As of 2/19: 0%
As of 8/21: 25%
Percent of companies with YTD returns > 10% -
As of 2/19: 2%
As of 8/21: 13%
Here's a link to a great discussion on the benefits of the sectoral financial balance approach, between @teasri and @DavidBeckworth on the Macro Musings podcast