Profit reporting season will reveal how much companies banked from the COVID

How much profit did large companies make during the lockdowns?

We’ll see evidence this week, when some of the biggest companies on Australia’s stock exchange release their profit results.

Telstra, Commonwealth Bank, AMP, AGL Energy, and Insurance Australia Group, are among the companies reporting their profits.

Will their results contribute to the debate about the disconnect between the performance of stock markets and the ‘real’ economy?

What about the JobKeeper program and executive bonuses?

International Monetary Fund says central banks are responsible

In August last year, after US stock markets were already back near record highs — despite the country’s deep recession and pandemic — the IMF released a paper on the disconnect between markets and economies in 2020.

The paper’s researchers said they considered several hypotheses for the disconnect (focusing on the US and Europe).

The most compelling hypothesis, they said, was “that unprecedented monetary policy actions … have driven asset prices up” by causing a sharp drop in “risk premiums and risk-free discount rates”.

Or, in plain English: With central banks everywhere slashing interest rates to record lows and pumping their financial systems with oceans of cash, it had made it far less costly to make financially risky investments, so investors had been treating stock markets (even more) like casinos, sending asset prices soaring while real economic indicators deteriorated.

The IMF researchers said that posed two problems.

Firstly, it suggested when central banks eventually unwound their unprecedented policies it “could trigger a reversal in asset valuations” — that is, steep falls on stock markets.

Secondly, it could undermine the public’s faith in monetary policy.

“Perceptions that monetary policy has supported financial markets and investors while being unable to revive real activity and reduce unemployment could reignite the debate on the implications of monetary policy actions for inequality and on central bank accountability and independence,” the IMF paper warned.

Janet Yellen, a former chair of the US Federal Reserve and now Treasury Secretary under US President Joe Biden, made a similar point in an interview with the Washington Post.

“The stock market isn’t the economy,” she warned.

“The economy is production and jobs, and there are shortfalls in virtually every sector of the [US] economy.”

In Australia, things are different

However, in Australia, the stock market was more tethered to reality last year.

On Friday, the Reserve Bank’s latest statement on monetary policy noted the ASX200 (which tracks the 200 largest companies on Australia’s stock exchange) was still sitting at about 2 per cent below its February 2020 peak on a total return basis, which takes dividends into account.

It said equity prices in the resources sector were almost back to their previous peak in early 2020, having contributed much of the rise in the ASX200 since March, and in recent months major miners had performed strongly on the back of higher iron ore prices.

It also noted the financial sector remained 12 per cent below its February 2020 peak, in part reflecting the substantial provisions Australia’s banks had made for a potentially large rise in bad loans.

However, by close of business on Friday, bank stocks did drive the ASX200 index to an 11-month high after the RBA signalled it would extend its “quantitative easing” program by another $100 billion this year.

The announcement lifted the share price of Commonwealth Bank (+1.8 per cent), Westpac (+2 per cent), ANZ (+2.1 per cent), NAB (+2.1 per cent), AMP (+2.9 per cent), Bank of Queensland (+2.2 per cent), and Bendigo and…