Why Is the Stock Market Booming?
nytimes.com
nytimes.com
Investors are betting that powerful interventions from Washington will protect the long-term profitability of major companies.
Which means that the market is 100% detached from the overall economy, economic outlooks, and company earnings.. again.
Allowing companies (even ones that are large and considered important like airlines) to "fail" just means that they'd have to go through bankruptcy proceedings and that the owners would lose some money - it doesn't mean that their operations will shutter, or that the planes will suddenly disappear, or that everyone in those companies will suddenly be out of work.
There are many examples of how this works - a recent one being PG&E in California, who filed for bankruptcy last year. Our electricity is still running and the linemen are still working.
Perhaps they should just be allowed to fail, but it's far from risk-free, especially when we're diving into a deep Depression the likes of which none of us have ever seen.
Some of the costs that you describe, like folks being less willing to invest in and work on things that have proven themselves to be unprofitable, may actually be benefits.
If the the whole market looked like this in the next year, people's 401k accounts would probably be demolished.
How many people do you know that truly had their lives ruined by the 2008 crash? Allowing the markets to find a bottom and recover creates opportunities for social mobility.
The people who don't want asset prices to drop are rich people. They are the ones who own the assets.
Also, beneficiaries of bankruptcies are the same billionaires and hedge funds being bailed out now. Distressed private equity funds will be salivating over all the fire sales.
Tells me their profit margins and market powers are holding the market back greatly.
For example, maybe Boeing has a design for a brand new plane that can carry 1000 people and go Mach 3. But it might take them 10 years to develop such technology.
The market would punish them severely for pursuing such a thing, so it makes more sense to buy back stock, otherwise they might get sued out of existence by their shareholders.
The market no longer values long term bets unless you are very special (Apple, Google, somehow Tesla). All those companies have mastered marketing their long term bets.
I think it’s highly problematic. It stifles pure research from the companies that have the most capital and talent to do it.
Isn't returning value to the shareholders the entire point of selling stock to investors in the first place?
Dividends are also saying "we have this amount of money on hand or cash flow, and no better use for it, so here you go"
I don't see the difference. Stock buyback looks to me like dividends without the tax - imagine a dividend reinvestment plan without the middle step and the tax bill.
100% feels a little hyperbolus, but, in general, hasn't that always been true--hence the common phrase "The stock market is not the economy." The stock market only partially reflects on the economy.
https://www.marketplace.org/2019/09/30/the-stock-market-is-n...
Why not retain or increase investments in stocks, and thereby propping stock prices up, especially if it's a long-term investment?
Also even at the end of the current quarantine period, companies are not going to pop out and be ready to go just as they were before. The economic landscape will look like after a hurricane has hit, companies that have laid off people are not going to be in a hurry to rehire them in my opinion. Companies are in general unlikely to rehire previously reduced folks (and reduced folks are likewise unlikely to want to return to previous employers), and are instead going to look for new candidates. What we typically see after recessions is massive movements of people between the sectors. The recovery will be a long hard slog. I'd love to share your optimism, but I think the hurricane analogy is apt, even after the sun starts to shine we'll be living in the aftermath of unprecedented economic destruction.
Airplanes I'll grant you - I can definitely see a world where flights swing closer to a luxury good like they were decades ago.
Yes, people will want to eat out. But it will be fewer than a few months ago because a) layoffs, b) less disposable income, c) the fear of less/no income soon, d) the fear/risk of getting sick, and other reasons I can't guess.
Whether that is -10%, -50% or -95% has yet to be seen and near impossible to predict usefully right now.
The Spanish flu killed like ?? tens of millions, also in a year or two.
There was a more protracted pandemic that killed a million around 1910-1920, but it wasn't a flu.
Which is another way of saying it's rigged.
- If you go to the casino with your own money, rational people will gamble what they can afford to lose.
- If you go to the casino but are told that whatever you lose, someone else will cover your losses, how much will a rational person gamble?
That's just a guess. I think the text book answer of equivalent of this is just hyperinflation (except that's when the money starts flowing into real price of goods and services)
[1] http://laborcenter.berkeley.edu/health-care-costs-under-job-...
I think (?) retail isn't much of the overall market, but it certainly seems like it would increase the agility of retail investment flows.
Absolutely no one knows what's happening right now. There are many explanations that are attempting to rationalize the behavior of the markets but the reality is the system has gotten so complex and there are so many derivative financial instruments and institutions who make their living off of some type of market manipulation that what we are likely witnessing is a confounding of different mechanisms all occurring at once.
The one absolutely conclusive thing you can gather from all of this is the prices of stocks have been and will likely continue to be detached from fundamentals for the foreseeable future.
My guess is that a future economist will gain their fame studying what is happening right now and creating a new theory out of it.
2. The Fed has committed all told nearly 10 trillion dollars, maybe more.
3. Very little macro data has been released. Market is pricing in a V-shaped recovery which isn’t out of the question if we can open up in May.
Having said all of this, I think we head lower as the health crisis turns into a really bad recession. There may not be jobs for these workers to go back to.
If we try to open up generally in May, without some massive improvement in testing and contact tracing (and the federal government withdrawing support for testing makes that less likely) the shape is going to be more like a left-right reversal of an italic N than a V, due to the devastating and probably higher second peak and the necessary response the run up to that peak will provoke.
Market was due for a fall, this was just what kicked it into gear. I doubt it'll be V shaped. I also doubt that you'll be opened back up in May. I don't see Italy opening up any time soon, and New State alone looks like it'll be worse than Italy.
In 2018 the fed was reducing their balance sheet - which seems to be the most important driver to equity prices rather than fundamentals.
Or put comically: I'm sure all video games are seeing a surge in players with people in self-quarantine.
And a more specific example(for the sake of illustration), so are many grocery stores: I have 3 small grocery shops around me in a quiet and residential area and they can take a breath. Even after the toilet paper crisis ended, every time I look out the window I see at least 5 vans unloading. And we are talking really tiny shops: the combined are of all 3 combined would probably not cover an area of 100 square meters. With that you have large production lines, warehouses, transportation companies and logistics fully operational and have probably reached their maximum capacity.
While tourism, air travel, restaurants(those that don't deliver food) and pubs, public events, concerts, all all of those will suffer for years to come, others will flourish.
And with all that, I'd argue that a lot of new markets will appear.
I'm well aware it's too soon to tell for certain but that's what seems very plausible to me.
If that isn't a sign that a recession is coming, I don't know what is.
I never said average Joe won't be affected by this. What I am saying is that the big players will still be big once this is over but there will be new players as well. Also China will likely lose ground in the global production lines, and companies will likely look at alternatives, even if they have to make a compromise with scale and price. Investors like safe bets and what the current situation has taught is is that China isn't a safe option. We knew that already but the nets around the foxconn factories are a bit... Out of sight, out of mind.
16 million is a horrific number and I sincerely hope they pull through without paying a heavy price. But put your mind in a different mindset - 16 million is an incredible amount of manpower. For the 16 million - that's a tragedy but for the people with deep pockets - that's a once in a lifetime opportunity if they play their cards well. And I'm more than certain that many out there will.
Obviously this isn't reality but if you have enough money to be considered an "investor", the 16 million unemployed aren't the people in the forefront of your mind. They're also probably watching the covid task force briefings while wearing the same rose colored glasses that our mango unchained has.
It's actually worse than that. The 16.8 million figure is for new jobless claims over the last three weeks [1]. There's additional people who were already unemployed before this, and there may be even more who've lost their jobs but haven't been able to successfully file a unemployment claim yet (due to the systems being overwhelmed).
[1] https://www.nytimes.com/2020/04/09/business/economy/unemploy...
It's not exactly over yet, it's just gotten less reported on - my local Jewel still has none on the shelf, and Amazon is out of brand-names (only sketchy sellers still have product).
As scary as the next 12 months appear to be, we will eventually return to a new normal, just as we did in 2010, 2004, 1990, etc.
This is not a properly functioning stock market. People are reacting to massive money injection by the government and the government picking upcoming winners and losers.
> by weighing the prior ~15 years of companies' profits
Are they also adding in the fact that 80% of the last 15 years has been due to life-support QE?
> Even a 12 month period of $0 profits should decrease the NPV of a firm's future earnings by 10%, not 50%
... maybe a 12 month period of $0 NET profits, but what about 12 months of $0 total revenue? For many, many companies that is not a 10% drop in NPV, but bankruptcy.
I agree we will return to a new normal, but what does that look like? Do we just go back to permanent QE like before where the debt market is artificially inflated forever? Or is this bad enough that the government gets to be part of larger corporate decisions now?
There is no model where the next 12 to 24 months looks "bright" for almost any company, so the fact that the stock market is mooning is not rational right now. Trying to justify it as "properly functioning" seems very, very far off base to me.
Yes, seeing a 30% drop in GDP this quarter is huge. Just like the 5 million or so who applied for UI.
However, the expectation is in a few months, restrictions will loosen and the recovery will begin.
So yes, the stock index should drop, but not by 33%. That was an overreaction. So now the market is going up, but it will still be down 10-20% until people get back to work.
I’m expecting something that looks more like a Nike swoosh than a V.
We have a real hard time with 1 year out.
Personally, I am waiting to see what 1Q earnings are and what 2Q projections look like for a few names I like.
My 401k hasn’t changed through all of this, just any spare change I have for my fidelity account.
Even fertility, dermatology and orthopedic doctors are all closed still.
So if there's a much lower chance of failure, prices for equities can be higher. Corporate bonds too.
But I'm not so sure this bounce will last. There's a fair chance this is some sort of short squeeze dynamic. Longer term we'll see what the damage to the economy actually is, whether people simply go back to how it was or things have actually changed.
I think the fundamental issue is that the stock market doesn't reflect reality at all anymore. Which isn't a novel point, a bunch of other commenters are saying the same thing. I think the only thing I have to add is that a small army of forex bots, automated buybacks, and zombie index funds has made it so that the stock market is programmed to never not boom. A market that reflects reality would be governed by supply and demand, not by seeing a ticker go up or a graph go up and to the right. But that's what investors want, so that's what all these mechanical interventions are optimized to do.
So why is the stock market booming? Because that's what it was programmed to do.
(Yes, yes, cite my sources, but it's a Friday and I'm lazy)
Solid states go into deep debt today, previously failed states will chew on it for the decade to come.
(Obviously if sucks if you or your loved ones die. But the economy doesn't care.)
https://www.wisegeek.com/what-is-the-greater-fool-theory.htm...
The government is pretty preoccupied with the current stock market, for better or for worse. If they are unable to fix the the economy and appease shareholders, the thinking might be that we have bigger problems with the value of the dollars themselves.
If we were to redraw stock charts using gold as the x axis (instead of $ USD), we would realize that company stocks have in fact all been dropping for the last 5 years.
The US dollar is not so different from the Venezuelan bolivar, it's also inflating and making the stock market appear to grow... But it's not the value of the stock which is growing, it's the value of the dollar which is shrinking (and so are all other fiat currencies which are pegged to it).