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.”
