Explain me this: the US stock market is at an all-time high and US unemployment is at depression era levels. How is this possible? It doesn’t make sense to me.
Yes, sometimes the vagaries of the stock market can be confounding. But the in addition to expectations already mentioned, investors often compare the potential return from stocks vs. other investments primarily interest bearing such as bonds. If interest rates are very low, then stocks will be more attractive. Right now, the Federal Reserve is maintaining a very low interest rate to help combat a possible recession due to the covid19 crisis. I think the low interest rates is also one major factor (although there are a lot of others).
Yes we should remember that stock markets pale in size compared to bond and currency markets. Money leaving another market can buoy stock markets in a way that is almost mechanical, separate from attempting to value individual stocks.
Some believe that stock market investors are not rational. Some believe that all trades necessarily involve an adversary called "Greater Fool" and that both parties believe the other is this fool.
I think the reality is that many investors sell when they think they hear bad news and buy when they think they hear good news. It does not matter anymore (if it ever did) what the net present value of all future profits is.
A couple of companies dominate the indexes: Apple, Microsoft, Google, Amazon, FB etc. They will do good no matter what, and are helped by "staying at home". So theres 90% of your answer.
In another obvious blunder by government ruling, the big companies that are publicly listed have had their competition literally shut down. So imagine you're a small hardware shop, well sucks to be you, because the government deemed you "unessential". Whereas Walmart has been left open because they sell food and hey wouldn't you know it, they also sell hardware items as well! What is better than having to compete for business? Have the government mandate your competitors out of business for you.
Then by that same token, do you expect to fly somewhere in the next 3 years? Do you expect people will buy cars and drive? Do you expect them to still use banking services?
If so wouldn't you want to buy the stocks now ? What does this forced shutdown and not-so-deadly-virus-that-we-were-scared-of have to do in 5 years from now?
And another question: How can the Fed/Treasury pump Trillions of dollars into the economy with apparently zero concern for inflation? My grade school understanding is that every dollar "printed" devalues all the money by that amount. I buy silver shares thinking it will go up with all this increased money supply. But no.
I don’t know much more than you on this, but I’ve seen this explained as such: inflation requires the injected money to actually be circulated in the economy in order to dilute the value of the currency. of the money distributed to companies and individuals during the pandemic, how much of it went to everybody’s “rainy day funds” and war chests? Most folks I know that are on unemployment right now have touched <20% of their funds, and Americans just hit a record savings rate[1] last month. Schwab has an article[2] that explains the monetary effects of this better than I.
The market is not much more than a collective guess as to where things are heading. The market today is a reflection of where investors think things will be in the future. That’s why the market tanked before the economy did and why it is up before the economy actually recovers.
It’s also totally irrational, might be rigged by the fed, and is almost certainly a glorified ponzi scheme.
The reason it shot up yesterday and this week is because the unemployment numbers for May were better than expected. There are numerous reasons to be skeptical of this data but, like I said, the market isn’t rational.
In a nutshell, he argues that stock price is a reflection of the long-term value of a company (“the present value of the company’s expected future earnings”, which is what stock price theoretically is). With low interest rates, the bad results of 2020 are drowned out by the expected return to normal earnings in the coming years.
> A pandemic crushes revenues. Stocks fall on general uncertainty and a fear of financial crisis and widespread bankruptcies, which would wipe out profits in perpetuity. The fears of financial crisis are resolved, more or less by the Fed and Congress pumping money into companies to prevent panic, so the bankruptcy risk is more contained. Stocks return to a price level that suggests a terrible year, followed by mostly normal.
As an aside, I highly recommend subscribing to his Money Stuff newsletter. Entertaining and pedagogical, it’s a great way to learn about the theory, inner workings and quirks of modern finance.
The stock market is not a direct reflection of how healthy the US economy is at large. As others have mentioned, gains in the stock market are being driven by a select group of companies that investors believe are poised to seize an advantage during these times.
This advantage can be a product that is well positioned for this situation (Zoom, Slack, Amazon), having large cash reserves to weather the storm and potentially buy competitors (Uber with UberEats + Grubhub), or a myriad of other reasons. Not many of which apply to companies in the wider economy.
There's a guy by the name of Lee Adler at liquiditytrader.com that does a great job of explaining all this financial market stuff. One thing that he always says is "Don't fight the Fed". The Federal Reserve was pumping billions of dollars per day to stop the market from falling. Now it sounds like leverage is taking the market to extreme levels again, while the Fed is quietly pulling back its support. Nothing good is going to come out of this.
Readit News
I think the reality is that many investors sell when they think they hear bad news and buy when they think they hear good news. It does not matter anymore (if it ever did) what the net present value of all future profits is.
In another obvious blunder by government ruling, the big companies that are publicly listed have had their competition literally shut down. So imagine you're a small hardware shop, well sucks to be you, because the government deemed you "unessential". Whereas Walmart has been left open because they sell food and hey wouldn't you know it, they also sell hardware items as well! What is better than having to compete for business? Have the government mandate your competitors out of business for you.
Then by that same token, do you expect to fly somewhere in the next 3 years? Do you expect people will buy cars and drive? Do you expect them to still use banking services?
If so wouldn't you want to buy the stocks now ? What does this forced shutdown and not-so-deadly-virus-that-we-were-scared-of have to do in 5 years from now?
[1]: https://www.cnbc.com/2020/05/29/us-savings-rate-hits-record-... [2]: https://www.schwab.com/resource-center/insights/content/stim...
It’s also totally irrational, might be rigged by the fed, and is almost certainly a glorified ponzi scheme.
The reason it shot up yesterday and this week is because the unemployment numbers for May were better than expected. There are numerous reasons to be skeptical of this data but, like I said, the market isn’t rational.
In a nutshell, he argues that stock price is a reflection of the long-term value of a company (“the present value of the company’s expected future earnings”, which is what stock price theoretically is). With low interest rates, the bad results of 2020 are drowned out by the expected return to normal earnings in the coming years.
> A pandemic crushes revenues. Stocks fall on general uncertainty and a fear of financial crisis and widespread bankruptcies, which would wipe out profits in perpetuity. The fears of financial crisis are resolved, more or less by the Fed and Congress pumping money into companies to prevent panic, so the bankruptcy risk is more contained. Stocks return to a price level that suggests a terrible year, followed by mostly normal.
As an aside, I highly recommend subscribing to his Money Stuff newsletter. Entertaining and pedagogical, it’s a great way to learn about the theory, inner workings and quirks of modern finance.
This advantage can be a product that is well positioned for this situation (Zoom, Slack, Amazon), having large cash reserves to weather the storm and potentially buy competitors (Uber with UberEats + Grubhub), or a myriad of other reasons. Not many of which apply to companies in the wider economy.