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Why is the stock market rallying when the economy is so bad?

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Re: Why is the stock market rallying when the economy is so bad?

#141

Post by jjoonathan »

catalogia wrote: post #98
cgb223 wrote: post #85

Earlier quoted context omitted.

> And if you have no faith in humanity, buy a survivalist bunker. What’s the rent on a bunker these days? If it’s cheaper than an apartment in SF I might go in on it

Unless you think the bombs are going to fall, you'd be better off getting some sort of cabin than a bunker. Living underground has a lot of challenges; it's expensive to build down there and you'll constantly be fighting moisture and mold.

I think the threat model is packs of desperate people looking to take your stuff, not bombs.

Re: Why is the stock market rallying when the economy is so bad?

#142

Post by namenotrequired »

thaumasiotes wrote: post #124
magicsmoke wrote: post #9

> And as has often been the case in recent years, investors find themselves faced with few attractive alternatives if they opt out of betting on stocks. The problem is so familiar it has its own acronym: TINA, or There Is No Alternative to stocks. Cash: Gets eaten away by inflation. Although the CPI doesn't indicate high inflation it only measures consumer goods. Inflation is there in the price of investments. If you…

> The problem is so familiar it has its own acronym: TINA, or There Is No Alternative to stocks. > the price of real estate is propped up by similar logic. This is where the idea falls apart. They can't both be propped up by the fact that there's nothing else around. They're two different things.

"No alternative" means "no better alternative". They can both be equally mediocre.

Re: Why is the stock market rallying when the economy is so bad?

#143

Post by lokl »

Several comments here about alternatives to stock, the poor returns of bonds, and cash being eaten by inflation. If you've been thinking about this and are a U.S. investor, read about I Bonds. Or, if you aren't worried about inflation and are investing for 20+ years from now, don't forget about EE Bonds.

Re: Why is the stock market rallying when the economy is so bad?

#144

Post by gvjddbnvdrbv »

steveeq1 wrote: post #108
notabee wrote: post #79

Earlier quoted context omitted.

At the current death rate, we're on track to reach 200k dead by early July. And that's only the deaths that are being counted. There is a substantial increase in overall mortality beyond the year to year average, beyond the confirmed Covid deaths. Considering that this disease is causing pulmonary embolisms, strokes, heart attacks, and other manifestations of out of control clotting even in healthy young people, we m…

There are considerable financial incentives to "fudge the numbers" regarding corona. It's to the point where if someone has a stroke, and he has corona, it will be counted as a "corona death".

It is highly likely that if someone with corona has a stroke it is caused by the corona. Coronavirus causes clotting.

Re: Why is the stock market rallying when the economy is so bad?

#145

Post by dcolkitt »

clomond wrote: post #132

Because a company’s stock price is in theory what the market expects is the sum of the total future discounted cash flows that unit of “equity” generates. [1] This means that fundamentally, stocks are forward looking several decades and beyond. The economy right now might be bad but if the expectation is that there is a slow and long recovery lasting 2 years, if a company is expected to be operational, profitable and…

Exactly. Here's a very intuitive way to think about it.

Disney World's revenue has currently fallen by 100% this period. How much do you think the fair market value of Disney World should decline by? Clearly the answer is much less than 100%. Even if Disney World stays closed for two years, it's clearly a very valuable asset. As an asset it probably has a 50 year effective life, so 2 years of closing represents no more than a 4% loss in cash flow. Interest rates are essentially zero, so Disney World should be no more than 5-6% less valuable than it was before the pandemic.

The biggest risk for corporate assets isn't the direct impact of the lockdown. It's whether the experience leads to any permanent changes in people's behavior. If there's a permanent cultural shift where people stop going on vacation or visiting crowded amusement parks, then Disney World might be worth much less. But this is significantly more speculative than estimating the direct impact of the lockdown.

Re: Why is the stock market rallying when the economy is so bad?

#146

Post by xcasperx »

toohotatopic wrote: post #14
nkurz wrote: post #2

https://archive.is/cmMx5 It's a decent article. Here are their 5 reasons: 1. Bets on a “V-Shaped” Recovery 2. Market Leaders Keep Rising 3. Corporate-Earnings Expectations Remain High 4. Old Habits Die Hard 5. The Fed’s Backing Personally, I'm betting we're still headed to a bloodbath, but slowly. This quarter's earnings are expected to be terrible, so this is already priced in. But the market is expecting a recovery…

Even if there is a second wave, there will be a time after Corona eventually. There won't be any new players by then so the market shares will almost be unchanged. Stock prices are discounted future profits for about 15 to 20 years. Those profits are still there when Corona is over. From that perspective, why should share prices fall by more than 5-10% for every year that Corona is locking down the economy? *edit: If…

This is assuming a (or near) 100% efficient market. Which it definitely is not.

Analysts use different methods to discount cash flows: https://www.investopedia.com/articles/professionals/072915/d...

Finding R (what to discount by) can be difficult to do: https://www.investopedia.com/articles/investing/021015/advan...

I don't work in IB or PE so take what I put with a grain of salt, just what I've learned.

Also, you know markets aren't near efficient when people invest in $ZOOM and not $ZM and when Elon tweets $TSLA stock is too high.

You can look at daily gainers and losers and watch them over the course of the week. They are extremely volatile.

If you're talking about the S&P500 it's a little easier to do. A little over 50% of the value of S&P 500 is the top 50 companies by weight. The top 100 equate to 70% and the top 250 equate to 90%.

Re: Why is the stock market rallying when the economy is so bad?

#147

Post by cft »

fiachamp wrote: post #127
kerkeslager wrote: post #99

Because the stock market doesn't represent the economy as most people experience the economy. First, a lot of companies don't pay out dividends or buy back stock these days, so as time passes, removing their stock price from the price at IPO, their stock price becomes based on perception--not even perception of the reality of the company's value, but perception of the stock's value, which is increasingly just specula…

I would add another factor lots of people overlook: the trend towards index investing. In the past, asset management involved actually analyzing the performance of a business, now it’s just trillions of dollars allocated merely by market cap. Index investing makes everyone QEs bitch - the end game for it is what we’re about to experience.

That's exactly right: index investing is more like a mix of a pyramid scheme and central planning. It's decoupled the stock market from the underlying economic activity.

Re: Why is the stock market rallying when the economy is so bad?

#148

Post by JMTQp8lwXL »

clomond wrote: post #132

Because a company’s stock price is in theory what the market expects is the sum of the total future discounted cash flows that unit of “equity” generates. [1] This means that fundamentally, stocks are forward looking several decades and beyond. The economy right now might be bad but if the expectation is that there is a slow and long recovery lasting 2 years, if a company is expected to be operational, profitable and…

Does this also mean that the market fundamentally thought, during the Global Financial Crisis, that the sum of the total future discounted cash flows permanently fell significantly?

I'd like to see how this concept would explain 2008. If it can, it further strengthens the thesis.

Re: Why is the stock market rallying when the economy is so bad?

#149

Post by majewsky »

steveeq1 wrote: post #108
notabee wrote: post #79

Earlier quoted context omitted.

At the current death rate, we're on track to reach 200k dead by early July. And that's only the deaths that are being counted. There is a substantial increase in overall mortality beyond the year to year average, beyond the confirmed Covid deaths. Considering that this disease is causing pulmonary embolisms, strokes, heart attacks, and other manifestations of out of control clotting even in healthy young people, we m…

There are considerable financial incentives to "fudge the numbers" regarding corona. It's to the point where if someone has a stroke, and he has corona, it will be counted as a "corona death".

What kind of incentives are we talking here? Honest question; I don't have insight into the medical care sector.

Re: Why is the stock market rallying when the economy is so bad?

#150

Post by fzeroracer »

clomond wrote: post #132

Because a company’s stock price is in theory what the market expects is the sum of the total future discounted cash flows that unit of “equity” generates. [1] This means that fundamentally, stocks are forward looking several decades and beyond. The economy right now might be bad but if the expectation is that there is a slow and long recovery lasting 2 years, if a company is expected to be operational, profitable and…

Doesn't this argument mean that the stock market should in theory be recession proof? If stocks are looking forward several decades, then it should be factoring in the recovery from any recession we face.

Which as we've seen during various recessions doesn't seem to hold true.

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