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Interpreting a market plunge

economist.com

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Re: Interpreting a market plunge

#51

Post by mcintyre1994 »

pbhjpbhj wrote: post #43
f_allwein wrote: post #37

Earlier quoted context omitted.

Had to Google HODL and learned it means 'hold', in the context of crypto currencies losing value. Can't comment on that, but for stocks, definitely yes. Historically, the market has always recovered from slumps. I know this does not mean it always will, but lots of people dropped out of the stock market after the crashes in 2001 or 2008 - for them, it would have been wiser to hodl.

The market as a whole recovers, but what proportion of [indexed] stock? What's the expected recovery time? (Say average for a randomly selected 10 indexed stocks). FWIW this is an academic enquiry, I'm too poor to gamble.

The idea of an index fund is you're invested in the market as a whole, not a selection of a small number of stocks. So a good index fund will crash when the market as a whole crashes, and recover in line with the market. The entire point is you avoid tying your performance to any selection of say 10 stocks, and typically an index fund will outperform most professional stock pickers.

Re: Interpreting a market plunge

#52

Post by crdoconnor »

adventured wrote: post #49
crdoconnor wrote: post #38

Earlier quoted context omitted.

>Low rates were expected to help kickstart the economy and prices and wages to increase. You're confusing the sales pitch used to justify low interest rates with what they were expected to do. They were expected to bail out insolvent banks and save them from the consequences of their collective bad decisions. Not raise wages. Not kickstart the economy. Fiscal stimulus is how you do that and they knew that. Had politi…

> They were expected to bail out insolvent banks and save them from the consequences of their collective bad decisions. They were also expected to - and did - bail out homeowners, having taken the hit of losing ten plus trillion dollars in fake housing value. The Fed also took trillions of dollars worth of junk mortgages off the market, dramatically accelerating value recovery for home owners. US home owners received…

Bailing out homeowners is done with loan modifications not 0% interest rates. HAMP was the closest thing we got to that but even that was done as a gift to the banks (Google for "HAMP foaming the runway" for deets).

A lot of homeowners did well out of low interest rates, but that was incidental. A lot also lost their homes and were rendered homeless. Under HAMP some home owners had their homes stolen from them - they were directed to go in to arrears in order to qualify for HAMP and after the bait and switch they were foreclosed upon.

In other countries fraud like that gets you sent to prison.

Not America.

Re: Interpreting a market plunge

#53

Post by RhysU »

mcintyre1994 wrote: post #51
pbhjpbhj wrote: post #43

Earlier quoted context omitted.

The market as a whole recovers, but what proportion of [indexed] stock? What's the expected recovery time? (Say average for a randomly selected 10 indexed stocks). FWIW this is an academic enquiry, I'm too poor to gamble.

The idea of an index fund is you're invested in the market as a whole, not a selection of a small number of stocks. So a good index fund will crash when the market as a whole crashes, and recover in line with the market. The entire point is you avoid tying your performance to any selection of say 10 stocks, and typically an index fund will outperform most professional stock pickers.

I like to think that it's being long on Capitalism.

Re: Interpreting a market plunge

#54

Post by dustinmoris »

I think we will see a bigger correction very soon. Markets crash periodically and we haven't had a crash for a while now. A periodic crash is not uncommon and actually makes a lot of sense when you think about the high level picture of what really goes on in stock markets. Stock markets are essentially dominated by greed (to get a higher ROI from stocks than through more traditional ways) and this greed leads to an increasing over valuation of assets over a period of time (multiple years). At some point the over valuation is so big that it becomes very visible to investors, at which point they get cold feet and start selling, and then... boom.

The markets drop to the point where the majority of investors agrees that the current valuation matches the expected ROI again and therefore stop further selling. After a couple years of conservative trading the markets return to become slightly more optimistic again and the game starts from scratch again.

It is a natural cycle and nothing we can do to change, just embrace a crash every 10-20 years or so...

http://macromarkets.ie/wp-content/uploads/2016/09/Asset-Pric...

Re: Interpreting a market plunge

#55

Post by tome »

tonyedgecombe wrote: post #31
thisisit wrote: post #8

The bigger concern is on the interest rate hikes. Low rates were expected to help kickstart the economy and prices and wages to increase. What has happened instead is that all the cheap money has caused asset inflation. US companies now have record amount of debt. Too fast increase in interest rates will cause their debt obligations to balloon and lower profitability. Though this will take couple of quarters to fully…

US companies now have record amount of debt. Yes, and the economy is at record size, nothing surprising here.

They key figure is debt to market cap ratio. So what's that figure?

Re: Interpreting a market plunge

#56

Post by lhopki01 »

icebraining wrote: post #44
paganel wrote: post #14

Earlier quoted context omitted.

Inflation is a very regressive economic phenomenon, so to speak. When it rises it tends to affect poorer people the hardest because they don’t have the negociating power towards their employers to keep their salaries’ increases above the inflation rate and second, and equally important, a larger portion of their incomes goes towards base purchases (food, gas for their cars or public transport passes etc), so if the p…

The alternative argument is that inflation is a progressive economic phenomenon, because it reduces the real value of debts (which are mostly owed by the poorer to the richer) and of accumulated wealth, whereas salaries end up adjusting even if with a bit of delay. What's the reality? Beats me!

Poor people have small debts on high interest rates and short terms (pay day loans). Rich people have large debts on low interest rates on long terms (mortgages). Who do you think benefits more from inflation?

Re: Interpreting a market plunge

#57

Post by pyoung »

fwdpropaganda wrote: post #23
thisisit wrote: post #18

Earlier quoted context omitted.

Why today(and Friday)? People track government data to form opinions. and first Friday of the month is very important because of a data point called Non-Farm Payroll or NFP. It is known to cause a lot of movement in the markets. Lot of brokers will tell you not trade during the announcement. You can see a lot of opinions on what was expected to happen on Monday by googling for NFP. Case in point: https://www.cnbc.com…

> Second, it seems you think these decisions are binary - to be or not to be or rather sell or not sell. It's not that simple. Lower markets doesn't mean everyone has sold off all their shares. They just reduce probabilities of their losses by reducing exposure. No. Obviously when I say "everyone decided to sell" I'm speaking figuratively. In any case, thanks a lot for that link. Cool stuff, I didn't know about the N…

> if the NFP comes out about X we sell, if it comes out below X we buy

The stock market works on supply and demand. For every seller, there needs to be a buyer. Let's assume that TSLA stock changes hands at a rate of 10k shares per day on average. The NFP report could cause a number of potential buyers to decide to hold off on buying. Assuming the sell interest is constant, this would likely result in a price drop. So no one has to actively buy/sell on the data in the NFP report (although some people might do that). If the NFP report causes buyers to stay home, prices will go down, and if it causes sellers to sit on their stock, prices can go up.

And of course this greatly oversimplifies reality. In any given day there are probably a number of different factors influencing sellers and buyers. Some people might be selling/buying to rebalance a portfolio. Some might be buying for their 401k. Some might be selling to cash out employee stock options. Some might be daytrading on the NFP report. And the movement in price is largely just a result of any aggregate imbalance between supply and demand. For me personally, I have stopped buying stock because I think the market is too overvalued right now. I know a few others how have stopped as well. As more people do this, the 'buy side' gets thinner increasing the odds of a drop.

Re: Interpreting a market plunge

#59

Post by isolli »

Apocryphon wrote: post #42

Here's a question - people often refer to the 2008 recession as a once in a lifetime event. On what basis do they make that statement- because mortgages can't possibly pop as massively twice? What's to prevent another industry (in recent years often rumored to be student loans) from doing the same? Who's to say not another sector is as rotten as real estate was?

It was certainly a once-in-a-lifetime event looking back: the greatest economic shock since the Great Depression [0].

As to why it is different now, this article [1] contains some answers (anyone can decide whether they agree or not).

[0] https://en.wikipedia.org/wiki/Comparisons_between_the_Great_...

[1] http://cepr.net/blogs/beat-the-press/it-actually-doesn-t-fee...

Re: Interpreting a market plunge

#60

Post by TekMol »

dustinmoris wrote: post #54

I think we will see a bigger correction very soon. Markets crash periodically and we haven't had a crash for a while now. A periodic crash is not uncommon and actually makes a lot of sense when you think about the high level picture of what really goes on in stock markets. Stock markets are essentially dominated by greed (to get a higher ROI from stocks than through more traditional ways) and this greed leads to an i…

    stock markets are dominated by greed
Greed is "an inordinate or insatiable longing for unneeded excess". I doubt one can show that this is what drives the stock market.

What we probably can agree on is that the stock market is driven by the actions of many actors who try to maximise the utility value of the assets under their control.

    an increasing over valuation of assets
We cannot show that assets are overvalued at any time. The value of an asset is very different to every actor. Everybody puts different expectations into the assets they control.

Even if we apply some 'simple' mathematical definition like the NPV of future returns, we could not say if an asset is overvalued in regards to that. Because the future returns are unkown. And we cannot say in hindsight either. Because the value of an asset is a statistical function of possible future outcomes. So the actual outcome does not tell us what the statistical function looked like.

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