Home > Uncategorized > It’s the profits, stupid!

It’s the profits, stupid!

from David Ruccio

profits-stocks

There’s no real mystery behind the spectacular gains in the stock market over the course of 2017. Much of it can be explained by the rise in U.S. corporate profits. 

But, as is clear from the chart above, the relationship between corporate profits (after tax, in red, measured on the right-hand side) and the stock market (the Dow Jones Industrial Index, in blue on the left) actually goes back almost a decade. Corporate profits have increased, from their low in the fourth quarter of 2008, some 176 percent. Meanwhile, the stock market has risen 182 percent from its own low in the first quarter of 2009.

Corporate profits are, of course, a signal to investors that their stocks will likely rise in value. Moreover, increased profits allow corporations themselves to buy back a portion of their stocks. Finally, wealthy individuals, who manage to capture a large share of the growing surplus appropriated by corporations, have had a larger and larger mountain cash to speculate on stocks.

Clearly, the United States has had a profit-led recovery since the crash of 2007-08, which is both a cause and consequence of the stock-market bubble.

However, that recovery has left most other Americans behind. First, corporate profits have increased in large part because workers’ wages have largely stagnated. Second, most American workers don’t own any stocks, either directly or indirectly. Stock ownership itself is highly concentrated, as the top 10 percent of households own well over 80 percent of the U.S. stock market.

And looking forward? I don’t make predictions but it’s obvious that the Republican administration is determined to do all it can to keep corporate profits growing and to make sure wealthy individuals keep a larger share of the surplus they receive. As long as that happens, we’ll continue to see the kind of lopsided recovery—including banner gains in the stock market—that has characterized the U.S. economy for the better part of the past decade.

  1. January 2, 2018 at 6:33 pm

    Very accurately and cogently presented, Prof. Ruccio! Had the American Recovery and Reinvestment Act of 2009 been for the needed $2.5 trillion (as calculated by Mark Zandi of Moody’s Analytics, Jason Furman, Christina Romer, et al.), instead of $787 billion, the recovery would have been far more balanced and widespread — with overall standard of living above what it is now. But it’s always political economy, isn’t it? https://www.youtube.com/watch?v=mDgKdF-oIEw

  2. Risk Analyst
    January 2, 2018 at 8:05 pm

    And The Forbes Richest 400 Americans data (article dated Oct 2017) shows that cohort’s average member’s wealth increased last year from 6 Billion to 6.7 Billion dollars, reminding all about the Piketty math that a 10% increase in your 401K if you have one is not quite the same as a 10% increase in the billionaire club’s investments.

  3. January 2, 2018 at 10:29 pm

    I left the following comment at the New York Times this morning, in response to Paul Krugman’s column https://www.nytimes.com/2018/01/01/opinion/can-the-economy-keep-calm-and-carry-on.html?comments&_r=0#permid=25399744

    “Well Paul, I’ve been covering much of the ground you did here, since August, asking myself how long the stock market can continue to climb, looking for potential bubbles, deciding that none of the nominees look large enough to have the impact of mortgage derivatives in 2007-2008, not the retail troubles, auto loans, real estate…Deutsche Bank.

    But I did notice Robert Schiller’s September 21, 2017 post at Project Syndicate, entitled “The Coming Bear Market?” One of two Schiller indexes (developed with a colleague, John Campbell) the CAPE one (Cyclically Adjusted Price-to-Earnings Ratio – for stocks, that is) was registering at 30, when the average in his remarkable data base from 1881 to 2017 was just 16.8. This index has only twice exceeded 30: and the years were 1929 and 1997-2002.

    That should get people’s attention.

    But I have another measuring rod for you: what does it say about markets and their “ethics,” or lack of them, when they can celebrate the policies from such a scoundrel as Trump, and party like there is no tomorrow?

    To me it means “the markets” protest social democratic policies, except perhaps the mildest ones, as under Obama, but would be quite comfortable with the country going in a more authoritarian direction as long as the top 20% were well cared for.

    Reminds me of all those calling attention to the divergence between capitalism and democracy under Neoliberalism.”

  4. January 2, 2018 at 11:45 pm

    NY Governor Cuomo says Tax Heist may be UnconstitutionalNew York governor says new U.S. tax code may be unconstitutional

    | | | New York governor says new U.S. tax code may be unconstitutional WASHINGTON/NEW YORK (Reuters) – The new U.S. tax code targets high-tax states and may be unconstitutional, New Y… | |

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  5. January 4, 2018 at 4:53 am

    “For the love of money is a root of all kinds of evils.” (1 Timothy 6:10) Profits are the love of money. Profits are the root of all kinds of evils. Syllogism complete.

    • Rob Reno
      January 4, 2018 at 6:25 am

      Jesus would make all men Godlike and then stand by sympathetically while these sons of God solve their own political, social, and economic problems. It was not wealth that he denounced, but what wealth does to the majority of its devotees. ~ UB

  6. Rob Reno
    January 4, 2018 at 6:14 am

    Profits are the love of money: F
    Profits are the root of all kinds of evil: F

    It is the love of money that is the problem, not profits alone. Therefore the syllogism doesn’t hold for the premises are false. I can find real world business examples of socially beneficial businesses that acted on higher principles than the profit motive alone. The profit motive is not the only motive leading people to engage in business. It is multinational corporations and corporatism that is the problem, not business per se.

    It is my view that what we need is a cultural renewal; a cultural renaissance if you will. We need to expose the destruction ideology of predatory capitalism (mainstream economics) and inspire people to augment the profit motive with the service motive. We need to being economics back into contact with ethics (morality) and ask what is the purpose of economic striving beyond “greed is good.”

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