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By New_Deal_democrat March 30, 2017 8:32 pm
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Corporate profits bounce back (in Q4 2016!)
One of the established long leading indicators is corporate profits.  But it is reported with a very long lag.  That's why in January, when I made my long range forecast for 2017, I used the less leading but generally reliable "proprietors income" as a proxy.

Well, this morning the Commerce Department finally reported on 4th Quarter 2016 corporate profits (did I mention there was a long lag?), and the result was that corporate profits were up 9.3% from a year earlier, and rose 0.5 percent quarter over quarter.

In so doing, corporate profits rose to their third highest level ever, beating all prior quarters except for the 3rd and 4th quarters of 2014:

Here they are compared to my proxy of proprietors income:

While profits did not establish a new record, the increase in Q4 2016 also increases my confidence that the economic expansion, including continued growth in employment and income, will continue throughout 2017.

Finally, since stock prices are a short leading indicator, while corporate profits are a long leading indicator, corporate profits generally forecast the *direction* of the subsequent several quarters of stock prices on average over the entirety of the quarter. Here's an updated look at the last 10 years of that relationship:

and here it is measured YoY:

Both of these measures show that after corporate profits pulled back, the average of stock prices for the entire quarter also went down after a lag of a quarter or two, and subsequently bounced back in the same manner.

 
I'm not in the stock market prediction game. But the increase in profits argues that any downdraft in stock prices is likely to be temporary.
 
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