Economic policies are powerful forces for the stock market. Whenever the money supply or federal deficit spending has grown faster than economic activity (which is happening right now to a HUGE extent), profit growth has been attractive. While the two don’t always move in tandem, this is clearly what the financial markets are predicting today. Large deficit-to-GDP ratios have, historically, been associated with periods of strong profit growth. The opposite it true when monetary stimulus has been weak. While profit growth is certain to collapse this quarter and next, the massive response from the government is likely to cause profits to recover quicker and stronger than is currently anticipated. The M2 money supply* has surged over 20% and the federal spending deficit is expected to balloon to 20% of GDP this year. These are mind blowing figures and represent a massive amount of stimulus. This is one reason why the market has recovered quickly and some indices are showing gains for the year (the Nasdaq Composite is slightly positive in 2020 as this is being written).
The virus could remain problematic and the road to economic recovery will be fraught with bumps and uncertainty. The old adage, “Don’t Fight the Fed”, applies as much today as it has during other crises. Remember that the currently high unemployment rate and plunging GDP numbers were not triggered by anything economic or financial. They are the result of people being required to stay home and businesses to shut down. This means when things start to open again businesses will be hiring and people will be spending. It can be difficult to look past the present, but successful investing requires looking ahead. Consumer balance sheets are the best they have been in years. Some individuals are making even more money with unemployment than when they were employed. We are not experiencing a depression or even a typical recession. A more appropriate description might be a repression. It is very likely that we may look back at this period and call it the Great Repression.
*M2 money supply includes all cash, checking deposits and cash equivalents such as CDs, money market mutual funds, etc.