Despite horrific unemployment figures and the chance this recession will top the Great Depression, markets are optimistic. What’s really going on?
According to Quay Global Investors, at least part of the bounce could be attributed to the severity of the March sell-off. The high number of tech stocks in the US indexes could also be responsible for the optimism. Amazon – which has seen many of its brick and mortar competitors forcibly closed for business – has seen an increase in profits (although it has opted to reinvest those profits in protecting its workforce against COVID-19). But given the recession is likely to top the Great Depression – leading to reduced consumer spending – that doesn’t go all the way to explaining the bounce.
Quay puts it down to massive stimulus spending – and the Kalecki-Levy profit equation.
“The profit equation recognises that all financial savings and spending offset each other, and real savings are represented by net investment,” Quay said in a note. “So company savings are really just national savings (investments) less savings from other sectors of the economy.”
Of course, there are risks to that view. Higher household savings and a fall in business investment due to a collapse in aggregate demand mean the net financial assets generated by deficit spending will not all accrue to the business sector. But stimulus spending is still playing a sizeable role in offsetting the crisis.
“$2.7 trillion is a big number and will go a long way,” Quay said in a note. “There is more than enough to go around, and we suspect US equity investors are willing to look though the near-term uncertainty and see a decent profit recovery in 2021/2022, supported by today’s deficit spending.
“The same accounting realities between deficit size and company profits hold equally true in Australia, UK, Germany, etc.”
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