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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?

#211

Post by huhnmonster »

toohotatopic wrote: post #17
simonh wrote: post #16

Earlier quoted context omitted.

The dollar plumbing relative to what? Not other currencies by the looks of it.

All other countries have the same need for printing money, so the value compared to other currencies should remain stable.

That is obviously true, but that poses another question: Since there is no "real" value for the dollar to compare to (same for all other currencies), what if all countries had printed money at the same rate and around the same timeframe? Comparatively, it would look like nothing changed, but in my opinion, the market would want to price that in as some sort of "inflation" (no idea if this really is inflation at that point), since compared to 2019 the intrinsic value of companies probably has not changed too much.

This is as very wonky explanation and I am aware that it likely has several errors along the way, so please tell me what I am not considering, I am genuinely interested.

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

#212

Post by TheOtherHobbes »

TheBlight wrote: post #138
rsp1984 wrote: post #135

What 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.

They're partially deceptive at best. The economy wasn't exactly flying even before the virus. Consumer debt (nearly $14tn - around 2/3 of GDP) was stifling consumer demand. Corporate debt was around $10tn - half of GDP.

When there's a major shock a lot of that debt will be written off, either be negotiation or by bankruptcy. So unless the Fed plans on making good on all of those debts there's going to be a big smoking hole where those obligations used to be, with corresponding losses to creditors.

The Fed has no interest in Main St, and is perfectly happy to hand out free money to Wall St to keep the party going. But if the economy isn't operating normally, that money is going to turn into worthless paper because it can't be spent on the usual things the 1% spend money on.

When that happens you get real inflation, because the face value of money becomes disconnected from real spending power.

Even if everyone went back to work tomorrow, people will keep getting ill and dying and business won't be back to normal for at least six months - possibly twelve. If workers don't get generous government hand-outs to keep demand ticking over in the real economy, there are going to be mass bankruptcies, and the debt collapse cycle will have started.

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

#213

Post by Ididntdothis »

DangitBobby wrote: post #190
Ididntdothis wrote: post #119

Earlier quoted context omitted.

“Because the stock market doesn't represent the economy as most people experience the economy.“ That’s my theory. The top 10% own most of the stock but their experience of this crisis is quite different from people who already had low wages now losing their jobs. I bet most of the people (not all) on this site don’t feel the crisis economically at all or only with minor pain. Personally I think we should stop looking…

I agree that metrics should be tied to actual individual income and not the stock market or GDP. (As an aside, my cynical belief is that we've always known those to be poor metrics but we use them anyway because they measure what people with power actually care about). But keep in mind that even median income is not a good indicator of economic standing with high cost of living. Whatever it is would ideally capture h…

That’s why I mentioned something like purchasing power.

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

#214

Post by [deleted] »

awinder wrote: post #74
Hydraulix989 wrote: post #50

Earlier quoted context omitted.

Why are stocks inaccessible to so many Americans? There are fractional shares, and you do not have to be an accredited investor.

Man this site is harsh some times, I think there is a lot of depth to this question. It’s easy to look at statistics and say that it’s because of massive wealth imbalances and that is 100% an accurate statement. But from experience / polling there’s also a ton of people who have bad financial hygiene, people who could & should be way more invested and aren’t. So I think there’s also very big educational issues at pla…

[deleted]

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

#215

Post by jldugger »

skybrian wrote: post #181
dcolkitt wrote: post #145

Earlier quoted context omitted.

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 mo…

I assume you're ignoring the discount rate entirely for simplicity? It doesn't seem like money ten years from now should be worth the same as money today. But I guess that implies that interest rates should go up eventually.

No, I think the OP addresses that obliquely here:

> Interest rates are essentially zero

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

#216

Post by shostack »

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…

So what would you say are liquid, relatively low risk alternatives to holding cash? Worth diversifying into other currencies?

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

#217

Post by kgwgk »

bamboozled wrote: post #154
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…

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?

The market is only wrong when it goes down, it seems.

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

#218

Post by AmericanChopper »

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…

> if a company is expected to be operational, profitable and growing in year 3-year 10, those profits are built into the share price.

Certain buyers may be basing their decisions on expected profits in 3-10 years, but this certainly isn’t the only reason that somebody may choose to buy a stock. Also, in that situation they wouldn’t be pricing in the profits that they expect to be made, they would be pricing in what they think the actual probability of that happening is (which would include some probability of those expectations not being met). If the future earning potential of a company is already fully priced in, then you’d have little reason to buy the stock, because it wouldn’t have any room to increase in value.

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

#219

Post by MattGaiser »

stefan_ wrote: post #113
MattGaiser wrote: post #52

1. The economy is not that bad for many companies in the stock market. Why would Proctor and Gamble be that negatively impacted during this? It lost 20% of its value though. Same with a stock I hold. It was slaughtered for being an airline stock, but it mostly does flights to remote communities, which are a government-funded necessity so they can eat and have medical care. P&G should not have meaningfully fallen and…

Uhm, because P&G is a full out consumer business and there is now 15% unemployment?

P&G mostly sells things that are essential, so these are not the things typically cut very much even when people are living on 60% of their incomes.

P&G did not take a large hit in 2008 either. P&G stock did though.

https://www.macrotrends.net/stocks/charts/PG/procter-gamble/...

https://www.macrotrends.net/stocks/charts/PG/procter-gamble/...

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

#220

Post by pineaux »

xondono wrote: post #153
jjoonathan wrote: post #117

Earlier quoted context omitted.

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..

You think Volkswagen makes cars for the poor? Show me a poor person who can buy a new car and I will show you someone who is borrowing.
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