{"id":2917,"date":"2020-05-02T10:58:28","date_gmt":"2020-05-02T10:58:28","guid":{"rendered":"https:\/\/www.maxlee.info\/blog\/?p=2917"},"modified":"2020-05-03T11:03:10","modified_gmt":"2020-05-03T11:03:10","slug":"the-stock-markets-rallying-while-the-economys-tanking-it-all-makes-perfect-sense","status":"publish","type":"post","link":"https:\/\/www.maxlee.info\/blog\/news\/the-stock-markets-rallying-while-the-economys-tanking-it-all-makes-perfect-sense\/","title":{"rendered":"The stock market\u2019s rallying while the economy\u2019s tanking \u2014 it all makes perfect sense"},"content":{"rendered":"

What\u2019s key to understand: Investors are always gauging the future prospects of the business world<\/p>\n

<\/p>\n

\"The<\/p>\n

Published: May 2, 2020 at 12:16 p.m. ET, By Cullen Roche<\/p>\n

The stock market in April had its best month since 1987. And the economy had one of its worst months ever.<\/p>\n

How is that possible? Is it a conspiracy by the Federal Reserve? Are stock traders insane? Both, perhaps?<\/p>\n

So what do we make of all this? Let\u2019s talk about it.<\/p>\n

First, the stock market is forward-looking. So while we see everything for what it is, the stock market is looking for what it might become. This ebbs and flows across time. The market\u2019s fluctuations are a series of guesses about future outcomes. Warren Buffett always describes this as \u201cMr. Market,\u201d a man (yes, a man) who is bipolar, constantly screaming out his opinions in a manic way. Sometimes right, sometimes wrong, but never in doubt.<\/p>\n

Mark Hulbert: Small stocks are sending a big message about a retest of the bear market low<\/a><\/p>\n

The Great Recession<\/strong><\/p>\n

To better understand how the stock market thinks, let\u2019s review the 2009 recovery. In November 2009, when the financial outlook looked dreary, the stock market SPX was up 53% from a year earlier while the economy grew 1% in the same period.<\/p>\n

The stock market anticipated years of future growth. In that case, the market was obviously right. But that is the way it will always look. The stock market will always sniff out a recovery before the economic data show it because people are setting prices based on what they expect to happen, not what is actually happening.<\/p>\n

\"Fed\"<\/p>\n

Here\u2019s the big thing the market is grappling with now. As I noted in my piece saying this wasn\u2019t the next Great Depression<\/a>, the government\u2019s response has been massive. This is the kicker for the stock market:<\/p>\n

Corporate profits = Investment + Dividends\/buybacks \u2013 Household savings \u2013 Government savings \u2013 Rest of world savings<\/p>\n

This is the Kalecki Profits equation<\/a>. And it\u2019s fairly easy to break down. Clearly, those first three items will be drags for the foreseeable future. Investment will collapse 30%-plus. Dividends and buybacks will slow 20%-plus. Household savings will spike 20%-plus. (They\u2019ll come back, but slowly.)<\/p>\n

Government savings, on the other hand, have been a huge boost. The government\u2019s deficit should be around $3.7 trillion this year. People don\u2019t seem to understand how big that number is. And how big of a boon this is to corporate America, because, ultimately, it all flows to corporations as Americans don\u2019t save.<\/p>\n

Government\u2019s heavy lifting<\/strong><\/p>\n

Let me put it into perspective: In 2019, net investment, dividends\/buybacks, household savings and rest-of-world-savings added up to $4.7 trillion. In 2020, the government is going to generate 78% of that all by itself.<\/p>\n

So here\u2019s what the stock market is facing: We have the potential for an unprecedented slowdown in the economy. Investment will collapse. Savings will spike. Dividends and buybacks will fall. But then you have a colossal spending package from the government sector.<\/p>\n

Looking out to 2021<\/strong><\/p>\n

So it\u2019s not remotely surprising to me that the stock market has recovered because it\u2019s now trying to guess when those other variables will recover. And if they do recover, then there\u2019s a very real chance you\u2019re going to see record profits in 2021 and 2022.<\/p>\n

So this isn\u2019t some Federal Reserve conspiracy theory. This isn\u2019t about the stock market being disconnected from reality. This isn\u2019t the stock market enjoying death and job losses. This is mostly about an unprecedented government stimulus that is going to households and businesses and, let\u2019s be frank, will not be saved by households because American households don\u2019t save.<\/p>\n

And when that household savings number falls, which it will, the money flows right into the coffers of corporate America. The stock market isn\u2019t dumb. It knows this. And it\u2019s pricing in that potential outcome as we speak.<\/p>\n

Cullen Roche is the author of the Pragmatic Capitalism blog, where this column first appeared. Follow him on Twitter @cullenroche.<\/em><\/p>\n

Source: www.marketwatch.com<\/a><\/p>\n","protected":false},"excerpt":{"rendered":"

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