1 ° Net profit rate
Before the crisis, the fall in the net profit rate indicates that US capitalism has too little financing capacity. This rate goes from 6.3 to 3.1 between 2005 T-1 and 2007 T-3. This fall in the net profit rate indicates that the potential (and actual) investments of US companies have become too weak to support stock market valuation levels that continue to grow at rapid rates: from 1192 in early 2005, they rise to 1490 end of 2007.
The result is not long in coming: the economy turns in 2008 and the S & P index collapses to 808 at the height of the crisis (2009 T-1). Accompanied by too little productive investment, the fall in the rate of profit announces this collapse; investments that are too low cannot promise very high dividends. On the backdrop of declining net profit rates, the fall of the S & P 500 index betrays a simple reality: there was a disconnect between net profit rate and upward market valuation that could only lead to a stock market crisis; net profit rate and market valuation cannot go backward from each other.
Hence a double conclusion: if between 2009 T-1 and 2010 T-3, the market valuation is accompanied by an increase in the net profit rate which is comparable, it is not the same after the end Since 2011, we can note a downward trend of the net profit rate which returns to a level close to that of 2005 in 2014 T-1. This slow decline is accompanied by no correction of the trajectory of the S & P 500 index. The market valuation of the index increases it from 1205 to 1835 during our reference period. It is 1997 at the end of September.
By promising more strong future dividends, the fall in the net profit rate denounces a stock market valuation that appears again exaggerated. The reverse march of net profit and market valuation rates heralds a probable reversal of the stock market.
2 ° Gross dividends and net dividends in share (or%) of value added.
Gross dividends consist of the total dividends distributed by US public companies. Net dividends are the product of net dividends minus the share of anonymous companies holding shares. Net dividends are similar to the totality of dividends distributed to households, the net dividend balance being negative for private companies for the benefit of households.
These two types of dividends measure the profitability of the shares for all shareholders (gross dividend) and for households (net dividend). We express the gross and net dividends paid to shareholders as a share of the added value of anonymous companies since it is the said companies that pay them and that this payment determines the profitability of a particular title deed: the share. We are not talking about its speculative profitability determined by the differences between two stock prices at two different times. We will return to this point a little further down.
First of all, the profitability of the shares is parallel to the market valuation between 2005 and 2009. When the profitability of the shares rises between 2005 and 2007, the stock market valuation does the same. In 2008-2009, the market valuation follows the downward movement of the profitability of the shares, it decreases with him.
Everything changes from 2010. The slight improvement in market profitability after this date is accompanied by a market valuation that is not at all commensurate. The slight increase in the value of dividends in total value added does not justify this stock market surge.
Net dividends, coming back to households, raise similar questions.
There is a parallelism between changes in the profitability of equities and changes in the market valuation until 2007. After that date, the fall in profitability of equities is accompanied by a notable phenomenon: in 2009-2010 the profitability very low shares held by households is accompanied by a rise in the valuation of the S & P 500 index, the recovery of equity returns in 2013 (9.3%) – intermediate level of that of 2006-2007 – n does not align the stock market valuation with that of the years 2006-2007 (1310-1477). The stock market valuation of 2013 amounts to 1643 points or nearly 200 points above the level where it should be at the maximum.
There is, therefore, a significant disproportion between the phenomena stemming from the real economy and those from the stock market. We can, therefore, argue that the entire stock market valuation cannot be justified by phenomena inherent in the real economy. All of our graphs argue in favor of two ideas that are correlative to each other. The real economy cannot justify the movement of market valuation, stock markets are overvalued.
Our previous findings are simply explained. Before 2009, the policy of the FED was normal. His limited intervention in the financial markets did not seriously disrupt the relationship between the real economy and the stock market. The indicators we have used all show a parallelism between economic indicators and stock market indicators that are based on developments in the real economy. Changes in the net and gross profit rates and the profitability of the shares perfectly confirm our statement.
On the other hand, the intervention of the FED very largely explains the disconnect between market valuation and economic phenomena. Taking into account that QE operations begin with the RMBS purchases of the Fannie Mae and Freddie Mac agencies to clear their accounts and support real estate in 2009, we take stock of the close relationships between QE transactions and market valuation. The first phase of market valuation corresponds to the QE operations aimed at supporting the real estate market, then to support the Treasury’s operations, these operations take place from 2009 T-1 to 2011 T-2.
The positioning in the QE transactions (2011 Q3 to Q2 2012) coincides with a relative stabilization of the value of the S & P 500 index. This position is broken in 2012 Q4 by the resumption of QE transactions aimed at again to stimulate operations and securities by supporting the Treasury (QE2) then the Treasury and real estate (QE3). This stimulation, which is coming to an end, has continued until today. That’s why the S & P 500 is so high in September.
It is therefore not the real economy that explains the variations in stock market values since 2009. It is the Fed’s QE policy that inflated stock market results by injecting colossal volumes of liquidity into the financial circuit.
At the end of these studies of graphs, we can, therefore, support the following thesis: the stock values – the backbone of the patrimonies – have been overvalued by the QE policy of the FED. It also follows that households in the top ten were able to support growth through consumption in a fake heritage setting. This state of affairs leads us to draw conclusions as to why the leading role of the top ten in the recovery is fragile.