Counter point: beginning of 2021, for weeks I was wondering why the markets were not reacting to Covid.
Only when travel restrictions were introduced, and only when they were introduced to the US, the market started taking notice.
Does the market extrapolate future earnings and macro economic trends, sure. Do some people have secrete insights beyond that? Sure. But I'd say the market as a whole is pretty stupid and reactive.
The narative here seem disengenious, framing everything as one extreme to another:
Then came the coronavirus-related market shock of 2020...everyone assumed the absolute worst...then everything ... went nuts... around the beginning of this year, when it all ground down to a halt.
I don't doubt you can find (many) examples to support this, and yes, the themes are along these lines, but this is not the absolute reality in many industries, geographies and companies. If companies that have been hit hard are still able to raise, though maybe it's more painful.
My take-aways are:
* This is not the end of the world
* Poor fundamentals will be recognized and punished (finally) but only for a while
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.
It is baffling, and I've been expecting a crash for a decade... which is the problem. The market can remain irrational longer than you can remain solvent.
Right now it's kind of persistently slightly irrational. A quick-and-dirty measure of its sanity is the P/E ratio: how much money are the publicly listed companies actually making? Right now, the number is around 22[1], meaning a dollar invested in the market takes 22 years to pay itself back purely in terms of corporate profits.
That's a return of about 3%. Numbers over 20 are generally considered a sign that the market is overheated. They peaked at around 45 and 65 right before the 90s and 2000s crashes. So there is revenue there, and not entirely out of line with stock prices, but not entirely line with them either.
None of that takes coronavirus into account; that's current price with last quarter's earnings. But if you assume that coronavirus is only temporary (it may not be, but let's be optimistic for a second) it means that long term the numbers are calling for a crash... eventually. One of these days. Longer than you can remain solvent while shorting it.
Probably.
In other words, I've got no idea what's going on. The markets have been weirdly stable (in price-to-earnings terms) for the past decade, at a number that's too optimistic, before coronavirus. Surely the inevitable at-least-short-term loss of earnings should have corrected that, but it hasn't. So either people are thinking very long term, or they're just nuts.
It was not easy to see that the market would move incredibly higher over the course of the pandemic. Not in January 2020, nor any time since then. People can't even explain it after it has happened.
Alternate hypothesis:
The next year to 18 months of earnings reductions due to covid is not enough to justify a 30% drop in net present value of the market at large.
Although market reaction is fundamentally hard to predict. It caughy many by surprise that markets reacted positively when Trump was elected. Or when there’s 150k people dead from coronavirus.
I do not believe our economy’s output exceeds that of 2019, pre-Covid. We still have supply chain issues up the wazoo. We still have disease taking out employees en masse, and for weeks at a time. Potential customers are generally in worsening financial condition. I simply can not believe that conditions are such, that the stock market should have a higher valuation than it did in 2019.
Any idea why the stock market is still holding up? Whether or not you think the virus will be resolved quickly, the economy has now taken a serious hit. Is the feeling that the government stimulus actions will be enough to completely erase the Covid damage? Will they resolve the shaky fundamentals and sky-high valuations we saw heading into this mess? Perhaps I'm a simpleton for expecting rational markets, but it seems like equities should be falling further.
Doesn't this crash highlight a fundamental problem with stock markets ?
NASDAQ: -25% in one month.
CAC40 (french stock market index) : -33% over the same period.
These stock markets collapsing is just stupid, it just shows that it's pure speculation...
The world economy takes a break during let's say 2 months (everything will resume as before afterwards) and hundreds of billions of euros/dollars disappear.
In fact, the question is: If everyone stops working because of the covid19, if the whole economy is paused (which is basically what is happening) why doesn't the stock exchange do not simply stop too? When a company presents quaterly financial results, it's over a period of _activity_. But then at the moment it's a period of total inactivity... ?!
The market had a chance to correct itself; or worse, get into a depression (bear market). But that didn't happen. It suggests two things: 1- Either the market is not over-priced and these companies have strong revenues and fundamentals; or 2- The US dollar is discretely hyper-inflating and it's showing only on stocks and other similar assets at the moment.
Sure there is a chance that we are in a bubble (by the way, we have been saying that since 2010. That's over 10 years) but after Covid, I think that fundamentals have changed.
You seem very knowledgeable on the market trends. What do you think the effects of COVID-19 will have on the market, given unemployment broke records and all that?
I was making a related comment to my coworkers earlier this week: if the stock market is this freaked about covid19, just wait til investors realize climate change is real and it will be hard to make money while NYC is flooded and nobody wants to buy oil anymore.
I'm neutral on the market right now, I don't think it's entirely unfairly priced. NASDAQ is in the best shape of the indices because tech companies don't seem hugely affected by all this insanity. Most major investment banks are expecting a huge boom in Q4/Q1 and return to business as usual. COVID new cases are trending downwards across all major economies (except the US, to follow soon) [1]
I'm actually feeling better now than I was in October 2018. Rates are lower, tons of financial stimulus, a waning problem and a warming stock market.
It depends on what people take away from this year. There seems to be little chance of any distancing restrictions returning in the US for covid so the market is being driven by how much people believe this has set a precedent which will be regularly repeated
Only when travel restrictions were introduced, and only when they were introduced to the US, the market started taking notice.
Does the market extrapolate future earnings and macro economic trends, sure. Do some people have secrete insights beyond that? Sure. But I'd say the market as a whole is pretty stupid and reactive.
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