The global economy is slumping into a depression but the stock market has almost recovered since the crash of 30%. What is happening? I am puzzled as well when my mother asked me when can we buy more ES3.SI.
The stock market is forward-looking and it is forecasting what will happen in the future. This is the “Mr. Market” who is looking at 3 to 30 months ahead of the economy. In other words, it has no link to the economy.
According to Kalecki Profits equation as below:
Corporate Profits = Investment + Dividends/Buybacks – Household savings – Government Saving – Rest of World Saving
Investment, Dividends/buybacks, and household savings are going to be badly affected in the near future. Investment (not your stock investment) will drop around 20-30%, dividends and buybacks will decrease by 30-40% and household savings will increase by 20-30%. All of these factors will affect corporate profits.
The key driver is the huge spending package from the government which will support and offset these factors. This is the key reason why the stock market has recovered and the market is trying to guess when all other variables will recover. The corporate profits will likely recover in 2021 or 2022.
When the economy recovers, the household savings will drop and pass back to the corporations. “Mr. Market” has already priced in that in the next 1-2 years time, a vaccine will be discovered and 95 percent of people will resume their normal lives.