I understand that the economy and the market are different but I'm so confused. The S&P is up ~12% this month, despite massive unemployment, a shrinking economy, and serious long-term questions about the outlook.
Is most of the 12% just market speculation that the virus issue will pass without a long-term earnings hit?
1. People keep saying about the market being up recently, but skip the part about it still being down about 10% since the start of the year.
2. S&P is heavily weighted towards the strongest companies. Amazon, Apple, Facebook, Microsoft and Google account for 20% of S&P market cap. Most of those companies have been helped by the pandemic, or at least not hurt nearly as bad as smaller companies.
3. The market is always very forward looking. It is essentially betting that things are as bad as they'll get. I don't know if I personally necessarily agree, but if you look at countries starting to open up it's not an unreasonable bet.
4. Government policy, both current and expected future.
I want to add emphasis on (2). The effects are not spread out uniformly across all businesses. The hard hit businesses including restaurants, bars, and hair and nail salons have seen almost all of their business evaporate. You're not going to find the corner nail salon in the S&P 500.
Absolutely. There will be some of those effects for sure, and they'll be pretty big. They will nonetheless be nothing compared to the small business owners that have bills to pay but no money coming in. Microsoft, on the other hand, is facing more of a blip.
These four main points all point towards a looming consolidation in the hardest hit industries. As many companies go bust their assets will be auctioned for pennies and purchased by the big names in those industries, or new competitors diversifying their portfolios into an industry they otherwise couldn't afford to compete in or break into.
I'm not without hope, but I fear we're going to see a lot of otherwise great businesses (breweries, bakers, barbers, spas, bars, restaurants, etc) go under and not get replaced by businesses of the same caliber anytime soon. If my barber closes I'll keep cutting my own hair. Same with my favorite local bakeries, restaurants, breweries, etc. I certainly won't start eating Applebee's microwave dinners and sugarritas just because they're the only joint in town.
I've diverted a significant portion of my savings due to this pandemic towards my retirement, but that actually has a small deleterious effect on my local economy as it is not strongly exposed to greater market forces as I'm reducing the volatility of money in my locus. I'm sure that I am not be the only one making choices like this.
No but you do find banks, chemical manufacturers, car dealerships, etc. the people employed by the corner nail salon buy goods, indirectly driving the economy.
The economy's response to "a large segment of the population has no money to buy things" seems to be selling more stuff and more expensive stuff to those who do. The economy is essentially trying to cut many people out of it entirely.
(and yes, I know 'the economy' isn't some sentient monolith)
yep. The assumption is they'll be able to borrow more cheaply and easily than ever before and will be able to buy up [assets of] more cashflow-constrained businesses in related markets relatively cheaply.
A related assumption is also that government bonds will be a less attractive alternative place for investors to park their money.
The S&P is where it was in October last year, there, it just erased the massive gain in Q1 this year. No serious recession is priced in really.
And the only thing that can explain where the stocks are now is that the Fed has pushed 2 trillions of liquidity into the market in matter of weeks, which is just unprecendented (the previous QE were much more gradual) and that lifted all asset classes.
But at one point stock prices will need to get back in line with earnings. I don't really hear anyone talking about v-shaped recovery anymore.
That's not entirely true, the composition of the S&P500 has pretty dramatically changed in the last few months[1].
If you look at the linked chart most sectors are down — energy is -50%, consumer discretionary is -27%, financials are -22%. However, a few sectors are up — healthcare is +5%, consumer staples +6.5%, information technology is +8.5%.
So with shelter-in-place and quarantine, it makes sense that the world's demand for oil and travel is at all time lows, and the stock prices reflect this. Instead, the demand is now almost entirely online, on the internet. Nearly every IT sector company is surging.
Even real-estate is down, as expected (fewer moves happening, less commercial leasing), but it appears to have a high variance[2]. Why is that? There are actually a few real estate companies on the S&P that are doing really well: $SBAC (operates wireless infrastructure), $EQIX (specializes in datacenters), $AMT (wireless and broadcast communications infrastructure), and $CCI (shared communications infrastructure).
So, many sectors of the economy are down, as are most companies. The current pandemic has pushed more capital to businesses which operate online. So the reason why the market cap of the S&P500 hasn't changed dramatically is because the distribution of the money underlying it has. The S&P500 is a capitalization-weighted index.
> But at one point stock prices will need to get back in line with earnings. I don't really hear anyone talking about v-shaped recovery anymore.
This week a lot of tech companies are reporting their earnings. Alphabet announced a 13% increase in revenue. If other tech, communication infrastructure, consumer staples, and personal health companies report similar earnings, then this whole thesis will be validated: the S&P500's current market value can largely be attributed to a flight-to-quality, where the "quality" is pandemic-proof stocks.
> So the reason why the market cap of the S&P500 hasn't changed dramatically is because the distribution of the money underlying it has. The S&P500 is a capitalization-weighted index.
That's super interesting and makes a lot of sense. However, could you elaborate a bit further? Suppose we have an S&P 5, if the top 5 companies remain the same, but they on average do worse, we'd see the S&P 5 go down. You seem to imply, if I understand correctly, that the S&P 5 is not down as much because 1 company did really well and stayed, 4 that did poorly left and got replaced by 4 companies that did really well, too. Thereby the S&P 5 changed its composition.
And that makes some sense. However, that would mean that if you had an all-world or all-us stock indexes, which did not exclude any companies dropping out of a top 100 or top 500 or whatever, would have to see a large drop.
And I'm not really seeing that. These stock indices track roughly the same shapes as the S&P500, with perhaps few percentage off, but nothing substantial.
> Suppose we have an S&P 5, if the top 5 companies remain the same, but they on average do worse, we'd see the S&P 5 go down. You seem to imply, if I understand correctly, that the S&P 5 is not down as much because 1 company did really well and stayed, 4 that did poorly left and got replaced by 4 companies that did really well, too. Thereby the S&P 5 changed its composition.
No that's not what's happening. Think of S&P 500 index as a basket of stocks. What does that basket look like? If I buy one "unit" of this basket, does it include 500 shares of stock, across the 500 companies? NO. The distribution of the basket is weighted, and it's weighted by market capitalization. So if all stocks were worth the same, you would have a unit amount of every single stock. But if, say, 5 companies do really well and 5 companies do really poorly, 1 "unit" of the S&P500 basket will actually include more of the "really well" stocks, and less of the "really poorly" stocks. The capital is automatically reallocated based on the market capitalization. Because of this, the market value of the S&P500 has stayed relatively stable.
> And that makes some sense. However, that would mean that if you had an all-world or all-us stock indexes, which did not exclude any companies dropping out of a top 100 or top 500 or whatever, would have to see a large drop.
Again, that's only true if this index is naive enough to not apply any sort of weighting. Most indexes in the world are weighted indexes, in fact we are generally instructed that indexes that do not apply any sort of weighting are bad indexes.
> 1. People keep saying about the market being up recently
So, down 10% from the previous bubble.
> 2. S&P is heavily weighted towards the strongest companies
Good point. Dow is also up almost as much though.
> 3. The market is always very forward looking.
I may be cynical, but I see perhaps 2 to 3 years to regain the jobs we are losing, to see the employment rate return to earlier levels. That's years of depressed spending, and all the other woes of society from high unemployment.
So the market is looking to, what, 2025 or something?
> So the market is looking to, what, 2025 or something?
Sure. People are basically betting that stock prices are cheap right now, and if they hold onto them for a few years they'll be back to where they were.
Look at the 2008 recession. If you bought then you'd be doing very well.
They're basically betting that the worst has already been priced-in. In a sense, they're probably betting that we won't get a totally calamitous re-opening of the shutdown, or a totally calamitous fall and winter next year. But, in any case, most people adhere to the idea that stock prices always go up eventually, and therefore they buy accordingly.
I think the only thing the market has going for it, is that everything else is worse.
Interest rates are negative or near zero, so bonds have the risk of losing value as interest rates rise, as the Fed needs to fight inflation. They also have no real upside, since interest rates are so low.
The Fed has agreed to print unlimited money to prop up businesses that basically don't exist, so having a bunch of cash is not safe, since the Fed is printing so much more of it.
So grossly overvalued stocks may be the best thing now.
> So the market is looking to, what, 2025 or something?
Well, another point not mentioned is, where else are you going to park your money? Interest rates globally are basically <= 0, real estate may be a dicey proposition for many years to come, bond yields are garbage, so... stock market. And considering so many companies are selling at a discount (regardless of whether or not you think that’s the case), dumping money in the stock market is a pretty good bet right now.
Normal investors lack the ability to invest in real estate the same way that wealthy investors do. It's nearly impossible for you and I to invest in a new office complex or similar. So normal investors are stuck with the housing (usually in a single market), existing small commercial, or REITs. Houses are fickle and gains are mostly due to luck (or volume). In my experience, yields on affordable commercial RE are not that far off from broader market yields.
Also, in the near-term (~1 years), you may see dramatically falling home prices as people lose their jobs and the supply of buyers dries up, and you may have difficulty collecting on rent with all the rent strikes going on and tenants who do not have the ability to pay.
Long-term these problems should work themselves out and real estate (particularly in hot coastal metros) should start going up again, but 2020-21 is going to be rough.
You can't even just spend it on crack and hookers. I wonder how many people's net worth is actually going up during the lockdown just because of reduced expenditure.
Who cares if it takes 3 or 4 years to recover if retirement is 20+ years away? Everyone knows you should buy at the bottom of a recession and people are betting that we've already bottommed out. And even if we haven't, stocks have been so cheap that it doesn't matter that much if we miss the absolute rock bottom. I'm up 60% for this month.
It also helps that some of the worst hit sectors like restaurants aren't generally represented in the stock market.
And as always the stock market isn't anywhere near a holistic view of the economy, it just gets over used because it's a convenient constantly updating number that can get slapped beside any news cast or announcement.
I was responding specifically to this comment that says "look at the Dow Jones instead of the S&P" to make a point that it's the same issue. I agree with parent overall in that I'm surprised the market is holding up as well as it is.
You're spot on. The companies you listed plus others are going to come out of this leaner, with fewer competitors, and a whole set of new people forced to learn how to use them. Great news for those companies.
I would also add a #4 to your list that people often miss. There is risk and there is uncertainty (think unknown unknowns). The market hates uncertainty because it is so hard to price. Risk though can be priced. This is often why the market will go up with numbers that look really bad when they come in. They are no longer uncertain.
This is very much what most people don't understand. The primary driver of market stress is uncertainty. Once that is gone and the bad news has been digested, that's it. If lagging indicators further confirm the bad news, that's almost irrelevant because there is no new information content there. Most traders are not stupid, they know the economy is going to tank. The information that there is going to be a recession is already known and pricd in. The question at this point is how much is it going to tank? If it tanks more than expected, or 2nd/3rd order effects materialize (e.g. solvency issues, deleveraging, etc...) then prices will fall more. At this point I'd also like to stress that what you personally expect is not neccessarily what the market expectation is. The market is never wrong in this sence, it is just a consensus of opinions. Opinions are by definition subjective. When new information arrives, the opinions change.
In a mathematical sense, the relationship isn't as much between the absolute level of the economy and prices, it is the tendency of the economy and the prices. You should look at the first (maybe second?) differentials.
Furthermore, values like GDP are inherently lagging. They show data that has happened months ago. There's almost no new information content in that number. Yes the number is bad, but everyone knew it's going to be bad. It sounds like (judging by the market action) that it wasn't worse than consensus.
Now, all the above is viewed through a lens of efficient markets. Reality is again more complex. As it has been pointed out, the price is not just driven by expectations about the economy or stocks, it is very much driven by central bank and government action. Easy money distorts prices. When Tesla which makes a puny 400k cars a year and has just about stopped being loss making is priced higher than VW which makes >6 million cars a year and made $17 billion, something is off. Let's put that into context, Tesla shares have priced in decades of non-stop geometric (20% YoY) sales growth to justify the _present_day_ valuation.
Don't think for a moment that traders don't know this. It's absolutely a game of musical chairs and they know it. Everyone, and I repeat, even the most boring, backwater pension fund board knows that this is a bubble. Everyone is participating and hopes that when the music stops, they'll have already made some safe haven stockpile to weather the storm.
The downside for those companies will be the regulators at DOJ. I have no doubt they will survive this pandemic in even better shape than before. The question then is if the government will work to break them up.
Obvious examples would be splitting YouTube from Google, splitting Instagram and WhatsApp from Facebook and forcing Amazon to pick a side (own the marketplace or be a seller).
It is no harder to inflate the dollar than any other currency. Print enough of them, and the their price will go down. It's no different from any other commodity.
The Fed balance sheet is kind of irrelevant. What that number means is the quantity of reserves in the system. Only the money that is spend in the real economy has inflationary effects. One more steep is necessary for that money to have real effect and that doesn't happen automatically in a depression.
If you increase the reserves, you are forcing the interest rate down, so you are making credit more cheaper (until it arrives zero and can't go further down).
For inflation to appear you need borrowers to who the banks think is good business to lend, and that spend that borrowed money in the economy. That it's not going to happen in a depression, when nobody wants to invest and the banks are scared to lend.
What is necessary is a decisive fiscal policy. That would increase the central bank balance sheet also, but what would cause some inflation would be the spending in the economy, not the number in the balance sheet.
It's definitely much harder to inflate the dollar than any other currency. If there's massive demand for the dollar, that's a huge deflationary effect on the dollar, which counteracts the inflationary effect. In times of crisis, everyone wants to be in the global reserve currency.
That's true, but "much harder" != "impossible". If you print enough dollars, there will come a point at which it will stop being the world's reserve currency. The only way to find out where that point is is to actually cross it. That will be a very painful experiment to conduct. If we ever get to that point, the world will learn the meaning of the word "hysteresis".
No one knows what's the limit of "enough dollars". It's not infinite but it's very possible that enough money can be printed to provide ubi to the lowest rung of the society ad infinitum
There is no question that this could be done. In fact, I think that this is a fairly reasonable policy. It effectively amounts to a flat tax on wealth to fund UBI. Personally I would prefer a progressive tax to "flatten the curve" more at the top, but I'd settle for an inflation-based UBI.
But that is NOT what is happening at the moment. What is happening at the moment is almost the exact opposite: money is being injected mostly at the top in order to prop up asset values, with a little bit coming in to the bottom via the $1200 relief checks, and the middle via PPP.
That's right. Trickle down economy is not ideal. It was a worthy experiment and it has failed. It's best to give MMT a shot and provide UBI to the lower rung of the society.
Well, stocks at the moment. The real value of U.S. stocks has not risen 20% in one month. What has really happened is that the U.S. dollar has lost 20% of its value relative to stocks. Inflation takes a long time to work its way into the economy at large, and it is possible that it won't happen. We managed to avoid it after 2008, but back then we had some very competent people running the show. I'm less sanguine about that this time around. My reading of the tea leaves is that the Trump administration will prop up stock prices by whatever means necessary because they believe (probably correctly) that many people will vote according to the bottom line of their 401ks.
But it is simply not possible to keep pumping currency into a shrinking economy without producing inflation. Sooner or later the law of supply and demand will catch up with you. The only question is whether it will happen before or after November.
That's because the economy has grown more or less apace with the money supply (or, more accurately, because the Fed has controlled the growth of the money supply to keep pace with the economy). Now we are pumping cash into a shrinking economy. You can't do that for very long without producing inflation.
Doubt it. Money velocity has been steadily dropping since the mid-90s. Take a look at this chart from the St. Louis Fed:
https://fred.stlouisfed.org/series/M2V
My guess is that it will be absolutely crushed when Covid-19 finally shows up in the chart.
This is a good point. CPI is very good at missing the classes of products that have seen massive price increases: housing, education, and other large assets.
Using rents and imputed rents and not home values is the correct way to include housing prices. When you buy a house you are not only paying for a place to live, you are also speculating on a financial asset. The CPI doesn't measure investment prices (eg. it doesn't include stock values) so to isolate the true cost of housing as a separate metric from the speculative value of the investment, it looks at imputed rent instead.
> 2. S&P is heavily weighted towards the strongest companies. Amazon, Apple, Facebook, Microsoft and Google account for 20% of S&P market cap. Most of those companies have been helped by the pandemic, or at least not hurt nearly as bad as smaller companies.
I thought I'd look up the performance of various indexes for the past month (as of the time I looked them up):
* S&P 500: +15.2%
* Dow Jones Industrial Average: +14.1%
* Nasdaq Composite Index: +17.9%
* Russell 2000: +21.7%
* Russel 3000: +16.0%
* Wilshire 5000: +16.3%
I then looked at the YTD, and didn't bother comparing them because they all essentially looked identical to one another.
Note that the DJIA and NDQ are mostly contained within the S&P are they are highly correllated. Weighting aside (I'm not actually sure what differencs their might be), the S&P is contained in R3k and W5000, but not R2k.
So no, I don't think the idea that Apple and Facebook are doing well (thus keeping hte S&P numbers inflated) holds weight. In fact, the Russell 2000 does not include the top 1000 companies (like the Russell 3000) and shows the highest return for the past month.
Rather, it seems like all of these indices are correlated. It reminds me of the Hillary Clinton autoregression of prediction markets during the 2016 election: immune to new information.
> So no, I don't think the idea that Apple and Facebook are doing well (thus keeping hte S&P numbers inflated) holds weight.
The easiest, and best, comparison for this is to look at the S&P 500 vs an S&P 500 equal weighted index (where all stocks are weighted equality, instead of weighted based on market cap). Over 3 months (i.e. just before the market peaked) the equal weighted index is down almost 15%, while the market cap weighted index is down just over 10%. This is clear evidence the larger companies are significantly outperforming the smaller ones.
The market incorporates news quickly, such as that there is a pandemic and it is going to have bad effects. Then it essentially forgets about it. I suspect most of the 12% is a response to government actions to control the pandemic and to the recent news that it is coming under control. You will see another drop if relaxing controls leads to another covid spike, and when economic effects appear on corporate financial reports, and when long term job losses are reported. Those are perfectly foreseeable, but in the meantime the market will likely go up as the memory of why they went down in the first place fades.
We'll see. Facebook might do poorly in Q2, but Alphabet does way more than advertising now: it does cloud infrastructure (GCP) and productivity (Google Apps for Business), both of which have experienced sharp gains in this pandemic.
We'll see if the lion's share of the pandemic closures happened in Q2? That's an objective fact. We started feeling it in March but the vast majority of action happened in April.
No, we'll see the degree to which Alphabet is exposed to the pandemic closures — which as you said, objectively happened.
A key detail from the Alphabet earnings: there appeared to be different performance trajectories for the brand and direct response components of their advertising. Direct response continued to have substantial year-on-year growth throughout the entire quarter — can be explained by brands now directly reaching people at home under quarantine. Brand advertising growth accelerated in the first 2 months of the quarter, but began to experience a headwind in mid-March. Snap's earnings call appeared to include the same observation, from Evan Spiegel: "In the short-term, we are shifting sales resources and pulling forward some investments in direct response to better serve the advertisers who are trying to reach our audience during this time…".
Additionally, Alphabet obviously also makes its money through Google Cloud Platform, whose compute usage will continue to pick up as more and more people consume online content at home. The net argument is that, even in Q2, Alphabet might come out looking stable because it is not as exposed to the downsides of COVID as, say, Twitter or Facebook.
Perhaps, we'll see. The market is purely speculative, and reflects where investors believe things are going.
At the moment, the stock prices of health care are up +5%, consumer staples +6.5%, and information technology +8.5%. Energy is down -50%, consumer discretionary -27%, and financials -22%. Due to this, the composition of the S&P500 has dramatically changed, most of its underlying capital is now in higher priced assets in the former list, rather than the lower priced assets in the latter list. Because the S&P500 is a capitalization-weighted index, the total market value reflects this.
Honestly this is all just a giant advertisement for investing in index funds.
4. Investors are driven by quarterly results. Q1 earnings are all being released right now by major companies, and since the pandemic only really hit in March, they're reporting pretty good results and investors are reacting as they always do.
This is despite the economic slow down as B2C companies losing 20-100% of their customers and B2B companies lose their B2C customers who no longer have income.
I agree and there is one other thing. Interest rates are 0 you can try to sit on cash but with the increase in money into the system, that is a loser long term. The Fed is buying things to keep prices up. There are trillions that have to go somewhere. Asset prices continue to propped up and people and funds are chasing returns.
On #2: No one is helped except perhaps medical supply companies. Folks are mistaking the durability of these companies in the face of SIP orders (due to their ability to function under WFH conditions).
"Sales of monitors increased by 73 percent compared to last year, PCs were up 53 percent, printers were up by 61 percent, and microphones were up by a massive 147 percent. Chromebook sales are also reportedly seeing triple-digit sales increases, which makes sense given how popular they are in classrooms.
Underpinning all this tech is a 70 percent increase in the sale of networking equipment. Although not detailed in Baker’s tweets, we’ve also seen a shortage of webcams, leading to skyrocketing prices."
It does look like some businesses besides medical equipment manufacturers have benefited. I'd be shocked if other things like sewing machines haven't seen huge growth in sales, also.
Panic buy? Monitors? More like the role of these devices is changing in people's lives. I'd wager that more people are going to be spending more time at home for quite some time, and that even for the people who won't, they'll start to be more sensitive to the shortcomings of their electronics after spending way more time using them than the would have had there been more things to do outside of the house.
> People keep saying about the market being up recently, but skip the part about it still being down about 10% since the start of the year.
It's also at the same level as one year ago. The economic situation, and outlook, is surely worse than one year ago? What has improved is the Fed inclination to make it true that stonks can only go up.
It is a bet on the continued support of the market by the Fed.
If you're interested in preserving purchasing power 15 years from now, would you rather hold dollars or things today?
As a value investor, all of my theses were blown out of the water by the unprecedented Fed intervention. It is an environment in which the fundamentals are uncertain. I'm standing pat and waiting for things to make sense before moving again.
The trailing (!) S&P P/E is greater than 20 right now. The Fed is supporting prices above their historical mean/median of 15. It makes zero sense, from a financial standpoint, unless the market is pricing in substantial inflation.
> The trailing (!) S&P P/E is greater than 20 right now. The Fed is supporting prices above their historical mean/median of 15. It makes zero sense, from a financial standpoint, unless the market is pricing in substantial inflation.
No, it's just pricing in low returns across all asset classes (to simplify, low interest rates) - assets are priced by excess returns not absolute.
There's nothing unreasonable about a P/E over historical norms if you think interest rates will continue to stay well below historical norms.
It is paradoxical that a sputtering economy can make equities worth more cheeseburgers, rather than fewer, but I see the logic. At some point, given the choice between a low-yielding equity and a cheeseburger, I'd rather have the cheeseburger.
Exactly. The thing people may also forget who have a long time horizon is that this is actually a bad thing. Returns are likely historically low going forward which is bad for your future retirement.
>> Returns are likely historically low going forward which is bad for your future retirement.
For sure. People are not factoring in the long-term interest rate here - they should look at the risk-free T-bill rates in the 1980s and how equities performed against them, and what we're looking at as well.
1. P/e does not mean much without context. Certainly not what the value of a company should be.
2. Fed helped and did what they are supposed to, which is good for everyone.
3. Market is forward looking and it should be, otherwise it would be dumb. In other words corona will pass, it is not the end of the world and if stocks went too deep, potential earnings from stocks within 5-10 years down the line would be huge, so anyone looking at that timeframe would be buying at discount.
High p/e does not mean things are overvalued. It means whoever buys into market estimates strong future potential. Now knowing that you can start to argue whether they are over or under estimating.
I felt like the biggest dolt that I didn't sell my stocks en masse a couple of weeks before the plunge, when it was already obvious C19 was going to be a big deal. I reasoned "The Fed will just inflate the currency to maintain stock prices anyway, so why would I want to go long on the dollar?"
Now a month later, my initial instincts don't seem so wrong anymore: My portfolio is doing fine... All I missed out on was a bunch of theoretical day trading gains.
(Too bad the things that really matter, like my friends that run local businesses, and everyone's mental health, haven't fared as well)
There was also biflation in the market, as many people have somewhat alluded to - tech stocks and specific sectors have exploded while others have collapsed. There has been a significant redistribution of alpha even if the total losses came in under what they expected.
It's studying for the test. It's too common to see a stock index as the stock market as the economy, buy they're all distinct things. Ideally an index _should_ represent that market, but when an economy becomes massively centrally planned by an overreaching fed, it's too easy to prop up those in the index to make the "economy" look strong. Ultimately, purchasing power, people's ability to save, liquidity of assets, etc were pretty bad before this recession. Those are the things we should actually care about - maximizing utility.
It's especially galling because the people pushing for these nigh-Stalinist levels of fed intervention and central planning (look how much support oddly favoured industries like manufacturing and coal get) are also posturing as champions of the Free Market. It's like we can't make any progress because nobody in charge is willing to argue in good faith.
If the dollar gets less valuable due to the government printing cash (or buying bonds or issuing loans they are expected to later write off), then things denominated in dollars increase, even if the real value remains unchanged.
It's hard to tell if the dollar is weakening, because most other currencies are in the exact same position.
Yes in fact the only thing you wouldn't want to hold is dollars; you'd want to hold things that will earn more dollars in the future (an inflation hedge), such as equities. Then you'd only care about FX rates (to the extent you are purchasing internationally), and I don't see any indication the FX futures market is moving against the dollar.
So 5 years out, the expected inflation is .37 - (-.418) = .788%; pretty low. In other words, the market doesn't expect all this money printing to translate into general inflation (as measured by the CPI).
Personally I would be dollar-cost averaging into equities.
I don't think they're strictly saying holding dollars is bad right now, just that it could be if inflation became a thing, which is not happening because as said by someone else, almost all other currencies are in the same boat. Plus everything is based on the dollar in the world economy. To answer your question though, if we were in a place where keeping cash was becoming a problem, that's where assets come in like stocks, bonds, real estate.
The S&P is a reflection of where traders are betting things will go. It is not a reflection of the economic reality at that moment in time. It's also down 10% YTD which is fairly substantial.
More important than anything though is that the market right now is absolutely rigged. It's not just irrational and forward looking, it is completely rigged. Central banks all over the world are directly propping up the market up. The market has never been more of a ponzi scheme for the rich than this exact moment in time.
The S&P crashed 35% before going up again, and is still significantly lower than it's high a few months ago. So I think it is more that the virus is not as bad as we thought a month ago (which seems to be true - projections in the US and Canada have gotten significantly better over the last month). The market does not go up or down when we get bad or good news, it goes up or down when we get news that is better or worse than expected.
Also, the S&P 500 is made up of mostly large companies, many of which could benefit long term from the virus. Sure in the short term there will be a revenue hit, but in the long term if their smaller competitors can't survive that hit and they can, they will become more dominant in the future. As far as I know, small business indexes have not recovered much.
The virus's effect on the US economy is significantly worse than it was estimated to be a month ago. Back then the thought was that we'd be fully operational in a few weeks. Now there's increasing evidence that we may be economically degraded for months or years.
It seems to me that the stock market or GDP are very bad measures for the economy. Maybe we should look more at average purchasing power or something like that which actually has real meaning for the regular citizen. The stock market seems to have turned into its own system that’s detached from the experience of most citizens.
Metrics like that would be a lot more directly meaningful, but the problem is they're impossible to measure. How would you find out what the average purchasing power is on a day-to-day basis?
I think they are. Plenty of people talk about the wealth gap and such. There's just no single number to condense the "average people ought to be able to get a lot of stuff" intuition.
Stock market is essentially a sentiment graph. There's no need for it to be linked to any underlying useful metric - it's entirely likely people are investing in stocks simply because all other investments are worse.
Obviously sentiment is a factor, but there are a million analysts with very complicated and dense spreadsheets trying to include every single detail to come up with their forecasts. It's nut just instinct.
No, I'm saying that eventually the value of a company is based on actual economic reality and not sentiment. Companies are either profitable or not. They either grow or not. In the end, share prices are based on these things, not just the whims of investors.
The stock market is not trading in baseball cards.
It's mostly companies that do well in any market or have a habit of surviving massive market disruptions. Sort by founded date. Almost all of them are 2000 or older.
To add to this: even within the S&P-500, the better ones seem to do much better than the average ones, so the NASDAQ-100 outperforms the S&P-500.
As an investor: Very happy with my "QQQ" (NASDAQ-100 ETF) investment, but my more diverse retirement portfolio is nowhere near as good. I have recently been buying hard hit stocks that I think will survive over the long term: Disney, Marriott..
As an employee: well, the trick is to remain employed.
QQQ was a good growth bet, but so is pure AMZN. 50% of QQQ is FAAAMIN (Facebook, Amazon, Apple, Alphabet, Microsoft, Intel, Netflix, with Cisco right below but they dont fit the acronym.)
Investing in Amazon is almost as profitable as a 3x leveraged parity risk bet on QQQ. I get what you are saying, "buy when people are fearful", but do you really think it will be more profitable than betting on the top 6 tech stocks?
Yeah, this is purely fear- people overshoot on the way down, you can profit. I made some easy money in 2008 on certain banks that were obviously not going to fail. The bet is that things return to some sort of normal. I would not normally buy these stocks, they have nowhere near the growth potential as the tech stocks.
I guess I don't believe in the statistical basis of the risk calculations (bell curve is an invalid model for sure for stocks), so only one stock is way riskier than you would think and tech only is already exposing you to some kinds of systemic risk.
The wealth bubble is still alive and well. Mass layoffs of low-wage workers don't change that very much, and the wealth bubble drives demand for investment vehicles as a class of goods. As long as it keeps inflating, the price of investment vehicles will keep going up, which includes the stock market. And as long as you expect it to keep inflating, you should expect the stock market to keep going up, unless there's a mass exodus into some other type of investment.
This may also help explain why many people are terrified of the wealthy getting less wealthy: it'll cause a massive market correction as the demand for investment vehicles decreases to a more reasonable level.
Well, that's a 12% increase following a huge drop. So the market is still 15% or so under its February peak.
A significant number of S&P 500 investors (roughly 40%) hold their investments in retirement accounts. These people are not going to sell unless forced to because they lost their jobs. If you're looking for a huge drop in the S&P 500, then keep an eye out on laws that allow for penalty-free withdraws from retirement accounts and reports that Americas are taking money out of their retirement accounts to live.
Also, there are plenty of people betting on the market going down.
> So the market is still 15% or so under its February peak.
The S&P 500 was up 29% last year. It's now back to the level of October last year - when there was no pandemic or economic crisis. So you could say that the market is remarkably blasé about the current situation.
The CARES act waived penalties for up to $100k in withdraws from an eligable retirement account, and lets you pay off the taxes on that ratably over the next 3 years, assuming you don't contribute them back to the plan, which you can do at any time during those 3 years.
AFAIK stocks are up due to the announcements that the lock downs will be ending. However, the surge seems rather short sighted: you can coax stores into reopening, but you can’t force people to go out and shop in them like they used to.
You will get 100 different answers. I like the argument that inflation is actually high, but our outsourcing of goods that make up the consumer inflation algorithm to cheaper countries makes it seem like inflation is low, but goods that can't be outsourced (education, housing, startup unicorns, financial assets like stocks) were eating the excess inflation that had no other place to go.
So the real value of stocks is lower when adjusted for true inflation, but everyone claims inflation is minuscule / nonexistent so we can pretend that printing trillions of dollars and handing it to banks is having no effect.
Can't post this enough these days. TLDR is that the stock market is forward looking. It goes up or down based on whether conditions are better or worse than EXPECTED. If reality is in line with expectations then nothing happens. If it's better than expected stocks go up, if it's worse than expected stocks go down. The current shitty economy has already been priced in as far as can be known.
Related to this is that the current circumstances are different from, say, 2008, which was a sort of internal collapse. A lot of this is external, regulation-driven. Not saying it's not a bad situation, or all government shutdowns of the economy, but there is a big element of it.
A lot of businesses are cutting back because people can't go out and do what they'd normally do legally. So when governments start easing restrictions, people [stockholders] are probably more optimistic because the situation seems more tractable. It's a lot more predictable than 2008 when people were talking about the collapse of fundamental financial institutions and systems involved in monetary supply because of their underlying structural composition.
I do think there's some disconnects in interpreting the stock market, but it seems to me investors are just seeing restrictions being eased, daily COVID case counts on a downward trajectory, etc. They're reinvesting in markets they see a path of recovery in, early.
What's less certain to me is if in say, July, this all gets worse again with overrun hospitals, etc. in a second wave. Then markets might really take a nosedive.
The last time the S&P price was at today's level, it was October 2019. The market is essentially saying that the forward-looking expectations of the companies in the S&P today are similar to what they were in October 2019. I'm not an expert here -- who knows, maybe they're right -- but I find that judgement very hard to take seriously.
I agree, but the bet seems to be (in so far as anyone can judge what the market is thinking) that the multi-trillion economic stimulus combined with other credit lines corporations are taking out will do their job on a macroeconomic scale despite anecdotal stories about it being inadequate for individuals. I don't think that's the case, but I don't have any data to say it's unreasonable.
Plus there is the expectation that once a vaccine is developed/distributed it'll be the roaring 2020s as everything recovers fully, which I largely agree with. So if you're looking at record profits less than 2 years out, makes for a pretty rosy outlook.
That of course is assuming there aren't any particularly economically devastating effects from the oil price wars/demand drop, educational lapses, hurricanes/wild fires on top of corona-virus leading to a renewed spike during evacuations, and any other manner of things that can go wrong. That's where I'm generally making the opposite bet, there's just too many unknowns and plausible disasters that can happen, and if even one of them comes true things get a lot worse quickly. But that's pure speculation/conservatism on my part.
The S&P500 is an index of some of the best performing companies in the US. Their performance isn't completely correlated with the broader market. Additionally, this damage to the economy is not permanent, most companies in that index will survive and continue to / return to paying dividends for a long time going into the future.
The top percent have spent the last fifty years severing worker productivity from worker compensation. In doing so they have made the stock market less and less related to the status of the average American. Only the two wealthiest people I know cared at all when the initial covid panic dropped the market by thirty percent.
Remember that in late March and early April, it was completely unknown when the economy would restart, with many people floating the idea of maintaining lockdowns for 18 months. It makes sense that the market is up from that low now that people in many areas are getting back to work.
Not sure how widespread this is, but my company is doing fine, business is up, yet due to COVID-19, is delaying raises and retirement contributions. Companies have a good excuse for layoffs and for not increasing salary.
The market ostensibly has a much longer view of things.
The word 'recession' is essentially meaningless without knowing the impetus for it.
The 'outsourcing of Jobs to China' is a huge, permanent, secular shift that may affect stocks one way or another, but the 'coronavirus' is something I think business believes we will recover from quickly - for the most part.
Tim Cooke told Trump he thinks it will be a 'v-shaped recovery'.
But remember that this recession was 'self imposed' in the sense that we ordered businesses to shut down. We can open them again just as quickly. Obviously that won't the entirely the case but I think this is the sentiment.
When a new CEO takes over a business, he might 'write off' a bunch of crap. Even though the company loses money that quarter, analysts see it as a 'positive sign' because the company is getting rid of dead weight on their balance sheet.
So like a 'one time charge' type thing.
I think markets are seeing corona as a 'one time charge'.
How many people do you know who are going to buy the latest iPhone this year or next? I can tell you that among my acquaintances, that number is vastly lower than it was if I asked the same question in February. And that's assuming that everything with the virus goes as well as possible, which it isn't.
The number of people who say they're going to is vastly lower, certainly. But I don't think that people's attitudes during a mandatory stay at home order are reflective of what we'll actually do once it's clear the worst is behind us.
My point is that many of these people are enduring real financial hardship. Many have already lost jobs or taken major pay cuts. The ones who haven't lost them are afraid of it, and diverting more money into savings and away from discretionary purchases. I assume the people I know are probably more white-collar and in relatively safer jobs than the general population, which (looking only at today's unemployment numbers) is bleeding badly.
This isn't about what people want to do. It's about what they will be able to afford to do.
Yes, but by this time next year they might not only be buying a the same rate as previously, but they might also even be buying a little more than usual.
Point being, the markets are seing corona as a 'flash crash' that will take some time, maybe 18 months to re-adjust, but it won't really hold things back long run.
If someone hits a vaccine the markets will go on a tear.
This month has been pretty good news for the economy. Vaccines entering trials, states passing the peak of infection, potential positive news with treatments, large amounts of government intervention indicating that the government and the fed are very focused on putting a floor on the economy, bernie sanders suspending his campaign, lowering how much influence he can have on the democratic platform, and so on and so forth. All things the market likes.
also, even if there is a decrease in earnings, interest rates are also lower, making stocks more attractive.
The market is still down from overall highs. We're not as far down as we were since we don't think it's going to be as bad anymore as we had feared. For 500 large cap stocks listed on US stock exchanges, perhaps about 12% better.
Also, in any recession situation, there's very high volatility. The days with highest stock gains tend to occur right before and during recessions. Even if there's a net downward trend, we'd expect things to be swinging all over the place as people keep overcompensating to the daily news
The market is a Keynesian contest. Prices are not based on some imaginary formula of GDP or profits. It’s based on sentiment, and thinking what other ppl feel about the market.
You wouldn’t bet the economy will be normal by the end of the year but you might bet others think it might.
?? What is the purpose in comparing metrics about our economy recessing based on production of goods vs a market for pieces of company ownership. They are not and never have been the same and there is no law they must follow the same trend
This is the most optimistic market participants (bulls) buying at low prices and creating momentum that others follow.
Waiting for them at higher prices are the pessimists (bears) ready to sell into the rally.
Since there really hasn't been a capitulation, where everyone who would ever sell actually sold, it's likely the bears are still in control. I think some people are mistaking the extreme volatility as capitulation.
> Since there really hasn't been a capitulation, where everyone who would ever sell actually sold, it's likely the bears are still in control.
I have heard this before, but I am having trouble feeling this. How do you determine capitulation? We had several days where trading was halted for a time due to steep losses, and 3/16 was the second biggest percentage loss in history (for the Dow at least).
If that isn't capitulation, what is? Hitting the 20% circuit breaker a few days in a row? Only in 1987 has the market fallen more than 20% in a day.
One reason I think the market is rising is because "everyone who would ever sell actually sold". Therefore, only the eternal optimists are left; the pessimists are sitting this one out.
Here’s why I don’t think it was capitulation. Check out google trends for “how to trade stocks” or a variation thereof. There was massive retail interest in buying the big dip, people aren’t interested in buying when capitulation has happened.
Perhaps the Fed intervened early enough to prevent a retest of the bottom, but I wouldn’t count on it.
Is most of the 12% just market speculation that the virus issue will pass without a long-term earnings hit?