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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?

#181

Post by skybrian »

dcolkitt wrote: post #145
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 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.

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

#182

Post by Rickvst »

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…

The thing is, in the formula, you have to use the rate "r" to discount the future profits. If the "r" decreases, the monetary value of stocks in the present increase, even though the cashflow has not changed. So, even if coronavirus decreases short-term profits, the effect it has on the global economy can lower interest rates, causing the present value of stocks to increase.

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

#183

Post by paulpauper »

An increasingly large % of the economy is concentrated in a handful of highly profitable, efficient tech companies and multinationals such as Walmart, Microsoft, Amazon, Google, and Facebook. Stimulus $ is pure bottom line growth for these huge companies as smaller businesses close. Also, huge growth in business to business commerce, bypassing consumer spending altogether. Facebook and Google selling ad space to other big businesses such as IBM. Microsoft, Nike, or Proctor and Gamble. Also, the wealthy are more impervious to economic weakens than the lower classes, and consumer spending growth from the top 10% is enough to offset loses in the bottom 90%.

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

#184

Post by alkibiades »

JMTQp8lwXL wrote: post #148
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.

yes because if a company goes bankrupt it’s future profit goes to zero

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

#185

Post by the-dude »

avvt4avaw wrote: post #166

The stock market is a leading indicator. Economic data (unemployment, manufacturing, GDP etc) are all lagging indicators. The terrible economic data (high unemployment, low growth) already showed up in stock market returns in the first three weeks of March. What we have seen in April/May represents improving expectations for the economy in the future (as in, a few months to a few years... in theory the market discoun…

Perhaps in this particular crisis, unemployment may be a leading indicator instead of a lagging one.

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

#187

Post by cheez »

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 first sell off was emotional, the rest was forced margin selling. It was beautiful.

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

#188

Post by clomond »

JMTQp8lwXL wrote: post #148
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.

I think it’s tough to say and tie it in directly. My understanding of 2008 is that the over valuations were tied in with residential Real Estate and the associated MBS’ (mortgage backed securities - the owners of the loans). Everything else was largely contagion and concern around the sanctity of the financial system.

The subsequent crash and economic calamity was focused on home owners, and existed within the financial system more broadly, not just stocks/equities.

Maybe a better example is the dot-com bubble - many investors thinking that “the Internet was going to take over” etc etc pets.com. So the thesis at the time was tremendous growth rates for questionable business models. Once it was evaluated as a “bubble” =~= overvalued =~= these set of companies will never make back there money -> a stock price correction occurred.

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

#189

Post by kube-system »

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?

There is a difference between being forward-looking and being able to predict the future.

Nobody thought the American economy was going to shut down, until it became clear that was going to happen. That was when we hit the circuit breakers.

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

#190

Post by DangitBobby »

Ididntdothis wrote: post #119
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…

“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 how much spending/saving power is left over after essentials (warmth, shelter, food, water, health etc).
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