The (US) stock market collectively "thinks" the economy will pop back up relatively soon (Q4-ish, 2020). If that rosy picture in the stock market's mind turns out incorrect, then rally go bye bye.
Why is the stock market rallying when the economy is so bad?
151–160 of 898 posts
Re: Why is the stock market rallying when the economy is so bad?
#152Earlier 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
The best thing you can do is make friends with your neighbors. Surviving disasters is a team activity.
[deleted]
Re: Why is the stock market rallying when the economy is so bad?
#153Earlier quoted context omitted.
How much of the TINA phenomenon could be due to lack of capital formation throughout the economy? e.g. if 90% of America is too capital poor to form businesses or dream up new economic needs, then wouldn't it follow that printing money into existing asset classes would simply raise their price with no viable places to invest the money?
Yes. I'm sure plenty of Theranos / WeWork style opportunities will emerge to pick up the slack. It's a fundamental problem of capitalism: the market's notion of "value" is weighted by wealth, without growth to stir things up wealth concentrates, and those looking to create value are increasingly forced to search for marginal "rich people problems" rather than tackle obvious "poor people problems." You wind up in a pa…
Exactly, you get rich by doing what the rich want, not what most people want, that’s why Lamborghini owns Volkswagen! Wait..
Re: Why is the stock market rallying when the economy is so bad?
#154Because 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…
Why did it dip in the first place then? Within the first few weeks of Covid19 the circuit breakers were dripped many times, if the market is so forward looking, what happened then?
Re: Why is the stock market rallying when the economy is so bad?
#155the newly printed $6T need to be absorbed, and the interest rate is low, and no new assets is produced, thus stocks and real estate.
Re: Why is the stock market rallying when the economy is so bad?
#156Earlier 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".
Blood clots are a symptom of coronavirus. I'm not sure what else we should expect here.
Re: Why is the stock market rallying when the economy is so bad?
#157What is most mind-boggling about this recent rally is that basically all the major indices are back to where they were Q2/Q3 of 2019. The Nasdaq is even back to January 2020 levels. Therefore, the market apparently believes that the environment for stocks today - COVID raging, approaching 20% unemployment, mass bankruptcies, etc - but also central banks creating trillions of USD - is overall as good as it was towards…
The unemployment numbers are deceptive. >80% are furloughed and would have their jobs back as soon as lockdowns end and business picks back up.
But realistically business won't bounce back this year, will it. Big parties in packed bars? Even without any governmental restrictions, I think a lot of people will avoid these things; because they don't want to get sick. This will also affect e.g. numbers of Uber rides, as well as how much beer/food the bars/restaurants buy. Businesses connected to foreign markets will also be affected by lockdowns there; airbnb will still be in a world of pain, as well as travel-related businesses.
Re: Why is the stock market rallying when the economy is so bad?
#158Because 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.
Yes. In fact, 465 US banks had their actual future cash flows go to zero and were closed permanently. A great number of other companies also never recovered and filed bankruptcy and/or were sold off.
Re: Why is the stock market rallying when the economy is so bad?
#159Because 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…
Adding in a little more nuance. Free cash flow to equity is discounted at the cost of equity. The cost of equity increases as future cash flows become riskier. However, costs of financial distress tend not to get baked into valuations unless they are obvious because they are not part of the normal valuation process.
This is why it might be possible that the stock market would not decline as much in 2020 / 2021 as it did in 2008 / 2009.
However, something seems fundamentally wrong with valuations at the moment, I cannot put my finger on it, and so I'm overweight fixed income until I'm more comfortable that things are going to turn around.
Re: Why is the stock market rallying when the economy is so bad?
#160Maybe something to do with the Federal Reserve buying $2.5 Trillion in assets over the past 2 months? https://fred.stlouisfed.org/series/WALCL