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Interpreting a market plunge

economist.com

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Re: Interpreting a market plunge

#81

Post by minikites »

You know you live in the best country in the world when rising wages cause the market to plunge: https://www.nytimes.com/2018/02/02/business/stock-market-int...

>The immediate catalyst was the jobs report, which showed the strong United States economy might finally be translating into rising wages for American workers.

We even punish individual companies for this: https://www.vox.com/new-money/2017/4/29/15471634/american-ai...

>American Airlines agreed this week to do something nice for its employees and arguably foresighted for its business by giving flight attendants and pilots a preemptive raise, in order to close a gap that had opened up between their compensation and the compensation paid by rival airlines Delta and United.

>Wall Street freaked out, sending American shares plummeting. After all, this is capitalism and the capital owners are supposed to reap the rewards of business success.

>“This is frustrating. Labor is being paid first again,” wrote Citi analyst Kevin Crissey in a widely circulated note. “Shareholders get leftovers.”

Re: Interpreting a market plunge

#82

Post by imron »

f_allwein wrote: post #37
EliRivers wrote: post #29

HODL, right! I am, anyway. The standard advice ("Buy low-cost index funds with dividends reinvested, keep buying on a regular basis, let it ride and don't worry about the plunges and the peaks") told us this would happen, and here we are. How to interpret it? I'd go so far as to ask should we interpret it? They get paid for coming up with reasons why things happened (after the fact, I note, although the Economist has…

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.

> Historically, the market has always recovered from slumps.

Historically, this isn't even a slump (yet). The dow can drop another 3,000 points and still be up 1,000 points from what it was this time last year.

Re: Interpreting a market plunge

#83

Post by danmaz74 »

tome wrote: post #55
tonyedgecombe wrote: post #31

Earlier quoted context omitted.

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?

Why debt to market cap? Maybe debt to assets, debt to sales and EBITDA, but debt to market cap doesn't look very significant.

Re: Interpreting a market plunge

#84

Post by tome »

danmaz74 wrote: post #83
tome wrote: post #55

Earlier quoted context omitted.

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

Why debt to market cap? Maybe debt to assets, debt to sales and EBITDA, but debt to market cap doesn't look very significant.

That's a fair point. But what's important is debt to something ratio (I don't know to what exactly) which neither of the first two comments on this thread seemed to make clear enough.

Re: Interpreting a market plunge

#85

Post by rectang »

headmelted wrote: post #48
fwdpropaganda wrote: post #12

Earlier quoted context omitted.

You see, the problem that I have with these kind of "explanations", is that those facts have been around for a long time. Why is it that precisely today (well, yesterday) was the day that everyone decided "right guys, we're selling equities"? The things you describe explain why people keep their finger hovering over the "sell" button, they don't explain why precisely today they decided to press it.

I don't live in the US, and my understanding of how the electoral system works out there is not fantastic, but it would also seem like there's some impact from the existential dread of democrats taking majorities in your mid-term elections. A lot of the run up since the end of last year was based on Trump's new tax plans, which the left were very much against, so it makes sense that measures would be taken to roll th…

> measures would be taken to roll that back

No chance of that happening until 2021 at the earliest, thanks to the presidential veto. The Democrats have zero chance of obtaining a veto-proof majority in the in the Senate.

Re: Interpreting a market plunge

#86

Post by minikites »

pcnix wrote: post #25
EGreg wrote: post #4

Guys, here is my analysis (which, after reading this article, may shed more light on the matters). We have had an asset bubble due to low interest rates. Because people don't want to keep money in banks. So we have had a bubble in crypto and stocks etc. As interest rates rise - and they will, because the government will need to reload for the next QA or whatever - asset markets will keep taking hits. The question is…

Ah, is there anything about Austrian economists I'm missing?

It's more of a religion than a useful tool: https://en.wikipedia.org/wiki/Praxeology

>Austrian economics relies heavily on praxeology in the development of its economic theories. Austrian School economists continue to use praxeology and deduction, rather than empirical studies, to determine economic principles.

Re: Interpreting a market plunge

#87

Post by danmaz74 »

TekMol wrote: post #76
dustinmoris wrote: post #66

Earlier quoted context omitted.

I never said that we can show that an asset is overvalued, I simply described what actually has happened in the past multiple times and what seems to be happening again. The truth is that investors will always pump as much money into a stock as long as there is still a logical explanation for a positive ROI. However at some point the stock becomes so hot that the general public will also start pumping money into it (…

I never said that we can show that an asset is overvalued, I simply described what actually has happened in the past We cannot even say in hindsight what was overvalued. We don't know if an asset was overvalued in the past. Because the value of an asset lies in the probability function of the future returns. Which can never be found out.

In terms of market value, you can say a financial asset was overvalued at time X if it later decreases a lot in vale, and undervalued the other way around.

Re: Interpreting a market plunge

#88

Post by fauigerzigerk »

fro0116 wrote: post #80
fwdpropaganda wrote: post #12

Earlier quoted context omitted.

You see, the problem that I have with these kind of "explanations", is that those facts have been around for a long time. Why is it that precisely today (well, yesterday) was the day that everyone decided "right guys, we're selling equities"? The things you describe explain why people keep their finger hovering over the "sell" button, they don't explain why precisely today they decided to press it.

Indeed. All I see from this and similar threads here and articles all over the internet on topics like these is: "blah blah hindsight bias blah blah rationalization blah blah" At the end of the day, the only useful theories for the stock market are the ones that have predictive power. I'd be interested in reading articles by people who are consistently willing to put their money where their mouths are and consistentl…

I think you're right that these theories and explanations are rarely useful for trading, but that's not the same as being wrong or unfounded.

There is clearly some causality in the economy. There is also a causal relationship between the economy and the stock market.

It's just that identifying a correct causal relationship or correlation and even making a correct prediction doesn't make you any money if everyone else is making the same correct prediction.

Re: Interpreting a market plunge

#89

Post by bryanlarsen »

fwdpropaganda wrote: post #12
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…

You see, the problem that I have with these kind of "explanations", is that those facts have been around for a long time. Why is it that precisely today (well, yesterday) was the day that everyone decided "right guys, we're selling equities"? The things you describe explain why people keep their finger hovering over the "sell" button, they don't explain why precisely today they decided to press it.

"everyone decided"

It takes very few people to move the market. To dramatically oversimplify, if there are 1 million buyers and 1 million and 1 sellers, the market goes down until the number of buyers and sellers are equal again.

Re: Interpreting a market plunge

#90

Post by Economics4u »

jnsaff2 wrote: post #78

"But because everyone worries and saves a little more, and invests and spends a little less, the economy gets stuck in a downturn. Recessions are an outbreak of collective madness." Or maybe "Recessions are an outbreak of collective sanity."

Perhaps you can explain how everyone can save in aggregate?

Where do people get this idea that "saving" is somehow virtuous?

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