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Comment by sytelus | Hacker News Reader

Meanwhile stock market is preparing to for its record high :).

The price of a stock is whatever someone will pay for it. The stock indices certainly have no obligation to reflect the current or future conditions of the overall economy. Some points to consider:

1. Stock prices follow trends. Increasing stock prices make stocks more attractive. These are the foundations of financial bubbles. History repeats itself.

2. Most of the valuation of an index like the S&P 500 is derived from a few stocks. 17.5% of the S&P 500 is the valuation of FAAAM.[0] Take a look at other members of the top 30 like Proctor & Gamble, Johnson and Johnson, Visa, Mastercard. The S&P 500 is mainly composed of companies essential to the daily functioning of the average American's life.

3. The stock market is essentially an unknowable process. Even the most profitable trading firms making billions of dollars a year make countless unprofitable trades each day and will go for years without turning a profit.

[0] https://www.cnbc.com/2020/01/28/sp-500-dominated-by-apple-mi...

> Meanwhile stock market is preparing to for its record high :)

Yes, and I don't understand it. The S&P500 is within 8% of its all-time high (3393). Even without a second wave of coronavirus cases and deaths, the current levels of unemployment, defaults, and bankruptices, I can't see what supports these asset price levels. Any ideas?

I've heard that all that QE and tax cuts from '08 and '20 goes into assets that are valued by rich people. Healthcare, real estate, college, financial securities, which drives up prices due to inflation. I'm not sure if I'm totally right, seems a bit too simple, but it makes enough sense to me. That money has to go somewhere, right?

Add that demand with demand from rich people from other countries for the same services (who might just loot their country and therefore aren't subject to the same domestic economic pressures) and prices keep going up.

The interest rate on government bonds is negative or basically negative through most of the world. Stock markets outside of the US have been struggling for a while now. There isn't really anywhere to get any sort of return these days, so the money ends up in the US stock market where it seems to get at least some sort of return.

Part of it is that there’s nowhere else to put the money. Currently we’re in a situation where no one has a way that they can spend money to make more of it.

Stock market is a future prediction machine. The price isn't the current valuation

By that argument it should have never went down back in April :). These are self-comforting arguments in the same line of "oh, it's all priced in".

Money is cheap, and where else would you put it?

The market is effective at allocating funds among equities, but the overall valuation of the equities market is another issue entirely.

Your not understanding is a direct consequence of the decade+ of discussion around the stock market as if it's "the economy". Of course conflating the two will cause confusion when they eventually diverge.

The average P/E ratio for SPY companies is around 15. The price of the stock today is built on the earnings of the next 15 years, and most investors seem to believe we'll bounce back in a year or two.

Good investors don't rely on P/E ratios. At this point, GAAP earnings are basically becoming smoke and mirrors:

https://www.forbes.com/sites/greatspeculations/2018/11/19/pe...

Markets function through buying and selling. More people need to be selling then buying for prices to go down. But the fed is just coming in and buying in the markets with no buyers so this mechanism stops working and unsurprisingly prices are staying inflated.

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