US personal income, July 2020

The US government's support during the early phase of the pandemic was very essential. Personal income was well supported, though the risk prevails that the republicans will cancel this support. The personal income surge may partially explain strong equity markets.

Like many of you, I have been astounded at the strength of the equity markets during the pandemic, and the Trump Administration mismanagement of the whole process.

And like many others, I never believed in the possibility of a quick V-shaped economic recovery, particularly since the pandemic has spread so efficiently around the world.

I have accepted the consensus wisdom that the equity market’s resilience can be heavily traced to the Fed’s promise to do whatever it takes in providing monetary support. This includes the strong likelihood that interest rates will remain extremely low right through to the end of 2021, and possibly even longer.

In that case, the equity market seems the only game in town.

But another explanation for the support of equity markets may lie in the evidence that personal incomes can be well supported by government programs, even in an environment of a partial or full economic lockdown.

The recent evidence underscores that despite the enormously deep US recession and the steepest job losses in generations, US labor income, heavily supported by government transfers, has been surging and retail sales has been rebounding.

Indeed, the June sales rebound was much stronger than expected, which also indicates that many businesses reopened despite worsening coronavirus reports.

Perhaps the markets take this as an early sign of a V-shaped recovery. If so, the markets are wrong.

(Click on image to enlarge)