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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?

#271

Post by clairity »

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…

no one who values companies professionally predicts cash flows more than ~5 years out, certainly not decades, because predictions about economies, governments, societies, and institutions are all salient to those future cash flows and those predictions become rapidly worthless as you look further in the future.

what happens in practice is that you take the cash flows of year 5 and you annuitize it into the far future with the estimated growth rate, and call it a day.

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

#272

Post by Barrin92 »

tryptophan wrote: post #249
telaelit wrote: post #239

Earlier quoted context omitted.

Trickle down economics doesn’t work. If it did then wages would have increased in the past 40 years, but they’ve remained stagnant while the rich get richer and cost of living skyrockets. But if you prefer to lick the boots of our plutocratic overlords, feel free

But...wages have increased over the past 40 years...and at a greater rate than in Europe/Aus/other developed.

real wages for the bottom 80% have not budged much[1], and are pretty much non-existent for the bottom 40-60% of the distribution.

The US has higher wages but mostly as a function of some sort of Baumol's cost disease. Increases in healthcare and education spending drive wages but they also drive costs. It doesn't really reflect a net gain in standards of living as hard stats like life expectancy show. the US has a life expectancy comparable to Cuba.

Not to mention that averages obfuscate the huge degree of inequality. Life expectancy differences between the richest and poorest in the US are larger (almost ~20 years) than between the American average and Yemen.

[1] https://imgur.com/vsUt8rF

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

#273

Post by JMTQp8lwXL »

chrispeel wrote: post #125
vadym909 wrote: post #31

Earlier quoted context omitted.

I'm surprised the average Americans (the 90%) don't get that they are providing insurance to the 86% wealth of the top 10%, but get almost none of the gains.

> I'm surprised the average Americans (the 90%) don't get that they are providing insurance to the 86% wealth of the top 10%, but get almost none of the gains. Are you so sure that they don't get this? I guess that many do understand it and either would like a much more inequality-reducing tax structure, or envision themselves as (somehow!) becoming part of the top 10%.

If every American worker started buying $100 worth of stock per month, they could start chiseling at that 86% number. Not every worker has the financial means to do so, but many could if they practiced financial constraint (delaying consumption now, in exchange for greater consumption later). To the extent it is feasible, it would be wonderful to see Americans fight back against wealth inequality by buying the ownership. Imagine how much progress towards equality could be made. Each household makes a choice with how to spend their money.

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

#274

Post by ryansmccoy »

While there are some good explanations already mentioned, the bottom line is that stock prices are forward-looking in the sense that investors buy and sell stocks not based on what happened yesterday or what is happening today, but rather based on their expectations for the future (6-12 months ahead).

So, basically, the market is signaling that on a whole (i.e. weighted average growth of all the companies in the S&P 500) things (i.e. revenue/eps) aren't going to get dramatically worse and potentially going to get increasingly better.

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

#275

Post by zanny »

jjoonathan wrote: post #117
lumost wrote: post #90

Earlier 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…

> To optimize this system, we should identify which extreme is currently posing a larger threat and back away from it.

Except to back away from it is to alter a relationship where the incumbent ruling class holds all the cards and controls all the influence and narrative. Which they don't want to do. So they don't, and the government they bought and paid for just write them windfall blank checks for trillions while the poor threaten governors since they are going to lose their homes and are going hungry.

The US had a chance to right the power balance when it was at its most equal in the post war boom period. But instead America decided times were good enough to let scrutiny slide - complacency in plenty and the optimism of the post-industrial were powerful drugs. Since then its just felt like the late Roman republic in its glutinous downfall. The feudal lords will pillage the state until the house crumbles from the inside with nothing left holding it together while the robber barons run wild and happy in their Deus Ex style post-capitalist dystopian corptocracies.

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

#276

Post by closeparen »

vadym909 wrote: post #31
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…

I'm surprised the average Americans (the 90%) don't get that they are providing insurance to the 86% wealth of the top 10%, but get almost none of the gains.

>average Americans (the 90%)

In what sense is 90% average?

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

#277

Post by mlthoughts2018 »

vadym909 wrote: post #242
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…

This makes a lot of sense but then shouldn't this apply to stocks like Netflix or Peloton. That once the people get back to work and gyms, these companies will struggle to grow as fast and in a way face permanent damage till the next pandemic?

No, it doesn’t work the same way because investors will already take this into account when modeling the future cash streams available. They will say, “in year X we expected the business to obtain $FOO cash flow due to increased usage during a pandemic stay-home order. But this anomalous usage doesn’t mean the company “lost” any growth if it’s numbers aren’t as strong later, instead we expect it to have $BAR cash flow in normal times.”

In other words, temporarily gaining more revenue in a way that does not jeopardize the regularly predicted revenue in other times will not create a “permanent” lack of growth, under any reasonable model of discounted net present value.

The only way it could have an effect like that is if it put some type of limitation or burden that reduced capacity for business later.

For example, consider a toilet paper company instead of Netflix. Everyone rushes to buy tons of toilet paper right now, which looks like amazing revenue growth, but investors will ask if everyone is going to have the same demand later. Eventually there will be an issue between the supply chain to make that much toilet paper and the stored up stockpiles of people who don’t need to buy more. Some companies could go bust during that event, others might have cash reserves or other lines of business, and the effect on stock price will be related to these.

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

#278

Post by thechao »

peterangular wrote: post #238
chrispeel wrote: post #125

Earlier quoted context omitted.

> I'm surprised the average Americans (the 90%) don't get that they are providing insurance to the 86% wealth of the top 10%, but get almost none of the gains. Are you so sure that they don't get this? I guess that many do understand it and either would like a much more inequality-reducing tax structure, or envision themselves as (somehow!) becoming part of the top 10%.

> or envision themselves as (somehow!) becoming part of the top 10% I don't disagree with you but want to add some insight to this... My entire life I've been told the lie that if I "just work harder" I can be rich etc. Most of America thinks about themselves in this same way, and it's taken me years of traditional employment + risky startup opportunities to realize that no, success is not guaranteed if you "just wor…

The original formulation of the statement of “work hard and you’ll make it” was created in the context of 17th-19th c. Europe, where no matter how hard you worked, if you weren’t landed gentry, you simply could not make it. The idea was that any opportunity existed. The universalist position you described is a rosy reimagining of a history that never was.

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

#279

Post by lowdose »

Because the recent economic stimulus didn't trickle down to the people that needed it. At least 80% of it ended up in the pockets of people that don't live from paycheck to paycheck and a after night sleep they decided to buy stocks instead of letting the value rot on their lousy bank account.

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

#280

Post by ericb »

californical wrote: post #174
tayo42 wrote: post #122

Earlier quoted context omitted.

> 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 ignorant question, if true, how is this not the worlds biggest ponzi scheme? Are we just betting on the possibility of dividends in the future? It just seems illogical. The fraction of meaningless ownership as a shareholder can't…

I am right with you, I've never understood what the actual purpose to owning shares is other than "their price goes up when the company is expected to do well" -- but what do you get for that price being higher? Without dividends the whole idea of stocks makes no sense to me. With dividends, I would think "I'll buy this stock for $100 with the expectation that I'll get a $10 dividend next year, a $12 dividend the yea…

There's a couple points you're missing. Even if there's no dividends, as long as the shares represent legal control, they can be purchased by other companies or individual to gain control of the profits, direction, or assets of the company. This gives the shares value independent of dividends.
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