Ask HN: What is going on with the US stock market? 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. |
Ask HN: What is going on with the US stock market? 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. |
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.
> My estimated value for the [S&P 500] index is about 2926, which would lead to a judgment that the index was over valued by about 6% (based upon the level on June 1, 2020). As with my March 2020 valuation, I am fully aware that my numbers are just a reflection of my story and that each of the inputs has a range around it, and I have brought in that uncertainty into a simulation below [...] Note that I have centered the simulations around the median estimates of earnings for 2020 and 2021 from analysts, while building in the range in the estimates into the distributions. The median value from the simulation is 2932. On June 1, the S&P 500 was trading at close to 3100, putting it near the 80th percentile of the distribution, bolstering the "market has gotten ahead of itself" camp, but there is something here for everyone. If you are more optimistic about earnings in 2020 and 2021 than the the median analyst, and about how quickly and completely the market will recover from the crisis shock, you will arrive at a higher value than mine. If you are more pessimistic about the future, perhaps because you think the market is under estimating the likelihood of a second wave of shutdowns or a surge in company defaults, your valuations will be much lower.
-- Damodaran , http://aswathdamodaran.blogspot.com/2020/06/a-viral-market-u...
Basically if you have nowhere good to put your money, you'll just throw it into stocks.