What explains the continued rise in equities?

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bigskyguy
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What explains the continued rise in equities?

Post by bigskyguy »

I am trying to get my head around the recent and rapid rise in equities over the last few weeks. In the face of what can only be described as brutal economic conditions worldwide, why in the world should equities be priced for perfection? And the only logical reason that I can surmise is that when it comes to future returns, nothing else seems better. For me, the only logical conclusion is that forward earnings, be they from stocks, fixed income investments, or real investments, should of necessity be dismal. Strikes me that all indicators suggest economic stagnation for as far as the eye can see. There are no good investments for future returns, just less bad ones.
I would really appreciate to hear from each and every one of you on this forum how you see this present moment?
clutchied
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Re: What explains the continued rise in equities?

Post by clutchied »

I think it's the "end in sight" and reopening the economy.
MotoTrojan
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Re: What explains the continued rise in equities?

Post by MotoTrojan »

When you buy stocks, you are buying decades of future earnings. Perhaps the economy is expecting dismal near-term earnings but a robust return-to-normal in the next 1-2 years.
thatme
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Re: What explains the continued rise in equities?

Post by thatme »

One thing I read is the possibility that small businesses will be the main casualties of the economic downturn and that large businesses will weather the storm and eventually grow as a result of picking up that market share. Those are the ones in the public markets at the moment of course, hence continued optimism.

But even that explanation seems crazy and somewhat unfulfilling.
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Schlabba
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Re: What explains the continued rise in equities?

Post by Schlabba »

The stock market is not the economy.

https://www.youtube.com/watch?v=0ECqDaPjjV0
Independent George
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Re: What explains the continued rise in equities?

Post by Independent George »

Aliens.
TheoLeo
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Re: What explains the continued rise in equities?

Post by TheoLeo »

Maybe starting tomorrow it will drop 20 % again. Anything seems possible short term and I am not sure there is a logical reason for these movements. If price earnings will get to 40 or 50 in the next years we can discuss why prices are detached from earnings and the economy. But these short term ups and downs don't mean too much i think.
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Re: What explains the continued rise in equities?

Post by Dottie57 »

I have no idea why stocks are doing well. If someone wants to review their allocations right now is a good time to do so.

As of today I am down 5.9% instead of the high of 13.5%. Guardedly optimistic about the next year or two.
cp73
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Re: What explains the continued rise in equities?

Post by cp73 »

I couldn't agree with you more. lately I had been selling off some stock funds as the market has been climbing, just knowing that big drop is around the corner. I guess thats why you should never try to time the market. Today, I dont know whether to sell or buy more. I guess I will sit tight.
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Re: What explains the continued rise in equities?

Post by Elysium »

op,

That's because you are not understanding how the stocks market is pricing future earnings. It's a given than earnings for 2020 is going be bad, negative, but 2021 is not going to be same, better. Taking out 1 year of earnings is not going to do anything for most large corporations, when you are looking at 10 year earnings, and the stock value is priced for future earnings involving many years. The stock valuation doesn't change very much for most companies if you simply take out 2020 earnings.
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iceport
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Re: What explains the continued rise in equities?

Post by iceport »

Mass delusion, possibly.

More probably a big dose of what I think J. Grantham calls "career risk" or "institutional risk." That's when professional money managers know better, but have to keep dancing with equities as long as the music is playing, or else they risk losing their careers or their institution's credibility if they sit down too soon before everyone else does.

Folks "worried" that they missed their fleeting TLH opportunities should just relax. 8-)
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7eight9
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Re: What explains the continued rise in equities?

Post by 7eight9 »

The "Buy the Dip" and "FOMO" crowds haven't had their optimism beaten out of them yet.
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TheoLeo
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Re: What explains the continued rise in equities?

Post by TheoLeo »

Elysium wrote: Wed Apr 29, 2020 12:29 pm op,

That's because you are not understanding how the stocks market is pricing future earnings. It's a given than earnings for 2020 is going be bad, negative, but 2021 is not going to be same, better. Taking out 1 year of earnings is not going to do anything for most large corporations, when you are looking at 10 year earnings, and the stock value is priced for future earnings involving many years. The stock valuation doesn't change very much for most companies if you simply take out 2020 earnings.
Is it really "just one year of earnings gone"? I would say the cost of this shutdown depends on how much cash companies have to burn through to generate profits. If the fixed costs of running a company are 10 X of profits, then a year of zero earnings but continuing costs would cancel out 10 years of profits.
Last edited by TheoLeo on Wed Apr 29, 2020 1:00 pm, edited 1 time in total.
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Re: What explains the continued rise in equities?

Post by mrspock »

I'm curious OP, did you ask the same question about why equities were plummeting in early March when very little data existed at the time as to the actual impact of the virus and its effect on the economy? People were guessing then as well, and yet the plummeting was seen to be perfectly rational.

This is how markets function, they project/predict into the future and then correct up or down when new information is known. In hindsight, the 35% drop in equities in just 2 weeks was absurd for the amount of information known at the time -- it was pure guessing combined with fairytales people were telling themselves. More data has come out over the last few weeks and Mr. Market is now correcting for his mistake -- is it too much the other way? No idea.
Flashes1
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Re: What explains the continued rise in equities?

Post by Flashes1 »

I think the market's seeing a slow reopening of the economy which is beneficial to equities. Additionally, there could be folks on the sidelines waiting to get back in, and the prospects of owning bonds at very low interest rates is not always optimal for some people.
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Re: What explains the continued rise in equities?

Post by Rosencrantz1 »

cp73 wrote: Wed Apr 29, 2020 12:24 pm I couldn't agree with you more. lately I had been selling off some stock funds as the market has been climbing, just knowing that big drop is around the corner. I guess thats why you should never try to time the market. Today, I dont know whether to sell or buy more. I guess I will sit tight.
I was buying on the way down and on the way back up.

The stock market is rising for several reasons -

Gilead's Remdesivir is showing some promise as a therapeutic (if used early).

Oxford University's vaccine candidate is showing real promise. I've read they're starting human trials and like some other vaccine candidates, they are already starting production of the vaccine with the expectation that it'll work. Oxford's vaccine could be ready as early as September 2020 in Europe.

People are starting to see 'light' as the end of the tunnel' - states are discussing steps needed to reopen parts of their economy.

US government flooded the economy with trillions of $$.

I have no idea if the recent lows will be retested. I'm pretty sure I'll be a buyer if we break into new lows - but, I wouldn't bank on it (the US markets hitting new lows in the near future). :happy
Last edited by Rosencrantz1 on Wed Apr 29, 2020 12:58 pm, edited 1 time in total.
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Re: What explains the continued rise in equities?

Post by nisiprius »

"Who can explain it? Who can tell you why?
Fools give you reasons; wise men never try."
--Oscar Hammerstein, "Some Enchanted Evening," from South Pacific.
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.
visualguy
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Re: What explains the continued rise in equities?

Post by visualguy »

Simple - huge amounts of money out there with no better alternative investment. It can stay detached from fundamentals for a long time.
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bigskyguy
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Re: What explains the continued rise in equities?

Post by bigskyguy »

mrspock wrote: Wed Apr 29, 2020 12:39 pm I'm curious OP, did you ask the same question about why equities were plummeting in early March when very little data existed at the time as to the actual impact of the virus and its effect on the economy? People were guessing then as well, and yet the plummeting was seen to be perfectly rational.

This is how markets function, they project/predict into the future and then correct up or down when new information is known. In hindsight, the 35% drop in equities in just 2 weeks was absurd for the amount of information known at the time -- it was pure guessing combined with fairytales people were telling themselves. More data has come out over the last few weeks and Mr. Market is now correcting for his mistake -- is it too much the other way? No idea.
Here's my question. Investments should flow to where future returns should be greatest. At present, investments are flowing into a stock market that is priced (P/E) for perfection, where future earnings for the price being paid are markedly lower than in recent memory. Have we entered an era where returns on investment, be they equities, fixed income investments, or whatever, are suppressed? Our economy is at standstill, and is unlikely to spring rapidly back onto its feet, yet the markets are acting as if the future is bright and future returns should be great. I simply don't see it. Seems like a complete disconnect between Wall Street and Main Street. And like most folks, I live on Main Street.
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Re: What explains the continued rise in equities?

Post by cableguy »

States are re-opening, big pharma is making progress on remedies and cures, and most importantly...there's no other place to invest!
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bigskyguy
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Re: What explains the continued rise in equities?

Post by bigskyguy »

visualguy wrote: Wed Apr 29, 2020 12:52 pm Simple - huge amounts of money out there with no better alternative investment. It can stay detached from fundamentals for a long time.
Huge amounts of money, without huge amounts of economic growth. Sounds like a recipe for inflation to me.
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bigskyguy
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Re: What explains the continued rise in equities?

Post by bigskyguy »

cableguy wrote: Wed Apr 29, 2020 12:58 pm States are re-opening, big pharma is making progress on remedies and cures, and most importantly...there's no other place to invest!
So more money without more productivity - something will of necessity have to give.
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Re: What explains the continued rise in equities?

Post by pkcrafter »

bigskyguy wrote: Wed Apr 29, 2020 11:59 am I am trying to get my head around the recent and rapid rise in equities over the last few weeks. In the face of what can only be described as brutal economic conditions worldwide, why in the world should equities be priced for perfection? And the only logical reason that I can surmise is that when it comes to future returns, nothing else seems better.

First off, the market fall was not based on logical thinking, it was based on a knee-jerk reaction. That happens when investors are hit with news and situations that are out of the ordinary. The impulse is to get out first, rationally survey the problem second.

We are now seeing investors with some information about the problem gaining some confidence and some sense of control. They are getting back in. They should not have gotten out, but they are getting back in.
For me, the only logical conclusion is that forward earnings, be they from stocks, fixed income investments, or real investments, should of necessity be dismal.

You are late to the party. That thought has now been dismissed by the investor crowd. Small caps have been hit very hard, but large caps are holding and will survive.

Strikes me that all indicators suggest economic stagnation for as far as the eye can see. There are no good investments for future returns, just less bad ones.
I would really appreciate to hear from each and every one of you on this forum how you see this present moment?

Saying there are no good investments for future returns is extremely short-sighted. Hold the S&P 500.


Paul

When times are good, investors tend to forget about risk and focus on opportunity. When times are bad, investors tend to forget about opportunity and focus on risk.
montanagirl
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Re: What explains the continued rise in equities?

Post by montanagirl »

I've long had a lingering suspicion that companies use these events as an excuse to lay off people they wanted to lay off anyway.

So, trim the fat, less overhead, more profit = winning! in the short term. :moneybag
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Clever_Username
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Re: What explains the continued rise in equities?

Post by Clever_Username »

It was said elsewhere and I'll repeat it. The big drop was guessing, the rise is guessing. Professionals are pricing in the best information they have. Some people are pessimists and worriers and seek out views that tell them the world is ending. Others are optimists and seek out views that tell them the world is going to be just fine soon. I think both views are noise, but if you have to listen to one, pick the optimists -- while they have the disadvantage that they can't be pleasantly surprised, at least the optimistic view will keep you from doing something sharply bad to try to prevent some big problem that probably isn't going to happen.

There are a lot of people lately who have done the investing equivalent of "oh my goodness, my house is on fire, I better call the post office right now so they know to hold my mail." Whether it was a whole house fire or something charred on the stove remains to be seen.
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Re: What explains the continued rise in equities?

Post by tibbitts »

bigskyguy wrote: Wed Apr 29, 2020 11:59 am I am trying to get my head around the recent and rapid rise in equities over the last few weeks. In the face of what can only be described as brutal economic conditions worldwide, why in the world should equities be priced for perfection? And the only logical reason that I can surmise is that when it comes to future returns, nothing else seems better. For me, the only logical conclusion is that forward earnings, be they from stocks, fixed income investments, or real investments, should of necessity be dismal. Strikes me that all indicators suggest economic stagnation for as far as the eye can see. There are no good investments for future returns, just less bad ones.
I would really appreciate to hear from each and every one of you on this forum how you see this present moment?
So you are asking what we know, on a forum where everyone claims to not know anything? Why would you think anyone here has any insight that you don't?
atdharris
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Re: What explains the continued rise in equities?

Post by atdharris »

Trillions of dollars in the markets from the government surely helped. I did not expect this kind of rise this fast. I keep saying I will buy on down days, but I think we've been up for maybe 6 days in a row? Except for yesterday's mild drop.
7eight9
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Re: What explains the continued rise in equities?

Post by 7eight9 »

montanagirl wrote: Wed Apr 29, 2020 1:02 pm I've long had a lingering suspicion that companies use these events as an excuse to lay off people they wanted to lay off anyway.

So, trim the fat, less overhead, more profit = winning! in the short term. :moneybag
And the companies that tried Work From Home and found out it works will likely continue to embrace it --- with less expensive employees. If one isn't needed in the office why are they needed in the same time zone?
I guess it all could be much worse. | They could be warming up my hearse.
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Re: What explains the continued rise in equities?

Post by BernardShakey »

A lot of the people on this particular thread claim to know quite a bit.
An important key to investing is having a well-calibrated sense of your future regret.
PVW
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Re: What explains the continued rise in equities?

Post by PVW »

It's all those aspiring day traders. Now they have the time to do it and they're driving up demand.

Who really knows what drives short term stock prices? Logic is not the answer. I watch the news of a single company (my employer), and often the price moves counter to what I would have guessed. It reinforces my Boglehead tendencies.

But like Einstein said, "God doesn't play dice". There is a reason, we're just not smart enough to figure it out.
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Re: What explains the continued rise in equities?

Post by JoMoney »

TINA.

There's no shortage of dollars, there is a shortage of investments with prospects for a long term positive real return.
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Re: What explains the continued rise in equities?

Post by Jozxyqk »

nisiprius wrote: Wed Apr 29, 2020 12:50 pm "Who can explain it? Who can tell you why?
Fools give you reasons; wise men never try."
--Oscar Hammerstein, "Some Enchanted Evening," from South Pacific.
BernardShakey wrote: Wed Apr 29, 2020 1:17 pm A lot of the people on this particular thread claim to know quite a bit.
Seriously. Remarkable to see so many posters claiming to understand this wild rise.

Note to OP: these posters have absolutely no idea. I'm confident that not a single one of them, if asked on March 23, 2020, would have had any inkling that the S&P 500 would be nearing 3000 in April.
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vineviz
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Re: What explains the continued rise in equities?

Post by vineviz »

mrspock wrote: Wed Apr 29, 2020 12:39 pm This is how markets function, they project/predict into the future and then correct up or down when new information is known. In hindsight, the 35% drop in equities in just 2 weeks was absurd for the amount of information known at the time -- it was pure guessing combined with fairytales people were telling themselves. More data has come out over the last few weeks and Mr. Market is now correcting for his mistake -- is it too much the other way? No idea.
This reminds me of 2009 when the stock market bottomed not because things were getting better, but because they were getting bad less quickly.

As an op-ed in the The New Yorker said at the time:
The glimmer of hope comes from the second sentence, which notes that five of the twelve Federal Reserve Districts “noted a moderation in the pace of decline.” In some areas, in other words, things are getting bad at a slower rate.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
ukbogler
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Re: What explains the continued rise in equities?

Post by ukbogler »

Jozxyqk wrote: Wed Apr 29, 2020 1:53 pm Note to OP: these posters have absolutely no idea. I'm confident that not a single one of them, if asked on March 23, 2020, would have had any inkling that the S&P 500 would be nearing 3000 in April.
Sven from northmantrader said a bounce to 3k was a distinct possibility. He also called the initial falls, although he was a couple months early.

He posts on MW quite a lot.

He even posts on here sometimes under an assumed name. Allegedly.
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Re: What explains the continued rise in equities?

Post by Robot Monster »

atdharris wrote: Wed Apr 29, 2020 1:09 pm Trillions of dollars in the markets from the government surely helped. I did not expect this kind of rise this fast. I keep saying I will buy on down days, but I think we've been up for maybe 6 days in a row? Except for yesterday's mild drop.
Yes, I've read many times that the liquidity injection is a big reason for the rally. This, for instance:

"Market participants have attributed much of the recent rally to monetary stimulus and credit guarantees by the Federal Reserve as well as the European Central Bank."

https://www.marketwatch.com/story/are-i ... =home-page

It reminds me of a Druckenmiller quote,
"Earnings don't move the overall market… focus on the central banks and focus on the movement of liquidity… most people in the market are looking for earnings and conventional measures. It's liquidity that moves markets."

https://seekingalpha.com/article/396671 ... et-success
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firebirdparts
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Re: What explains the continued rise in equities?

Post by firebirdparts »

vineviz wrote: Wed Apr 29, 2020 2:00 pm

As an op-ed in the The New Yorker said at the time:
The glimmer of hope comes from the second sentence, which notes that five of the twelve Federal Reserve Districts “noted a moderation in the pace of decline.” In some areas, in other words, things are getting bad at a slower rate.
This is super interesting, and it's useful to imagine people going back to the levels of consumption and standard of living that they had back at Christmas. That is all it takes to get back to "normal". In 2009, we had to recover from banks having a lot of lazy employees that didn't really care much about the bank. What they were looking at was bank contagion only. The "means of production" were unaffected. In 2020, for consumers, they have to decide the risk of death caused by their consumption is negligible. We can get there (mentally), but it's a different road.

For businesses, the risk of death of employees is too big an area for me to appreciate. Lawyers will be exploring that landscape for the next 40 years.
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Jozxyqk
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Re: What explains the continued rise in equities?

Post by Jozxyqk »

ukbogler wrote: Wed Apr 29, 2020 2:17 pm
Jozxyqk wrote: Wed Apr 29, 2020 1:53 pm Note to OP: these posters have absolutely no idea. I'm confident that not a single one of them, if asked on March 23, 2020, would have had any inkling that the S&P 500 would be nearing 3000 in April.
Sven from northmantrader said a bounce to 3k was a distinct possibility. He also called the initial falls, although he was a couple months early.

He posts on MW quite a lot.

He even posts on here sometimes under an assumed name. Allegedly.
A "distinct possibility" eh?

Looks to me like he acknowledged having no idea:

My view: Flexibility over certitude. Anyone expressing certitude about what will or will not happen has access to information I don’t have or perhaps they are simply projecting of what they would like to see happen.

https://northmantrader.com/2020/03/28/answers-2/
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Re: What explains the continued rise in equities?

Post by TheoLeo »

If you believe the market is overvalued for the current future expectations, it should be easy to find the companies that are obviously overvalued.
Here is what you need:
- daily losses in the current situation
- pre-pandemic yearly profits (which we assume the company will bounce back to)
- pre-pandemic stock price and current stock price
- best guess of how long the current situation will last until earnings go back to pre-pandemic times

I´ll start.

Lufthansa, europes biggest airline.
- current daily losses: 24 million euro (almost 10 billion in one year)
- pre-pandemic yearly profits: 2,5 billion euro
- pre-pandemic stock price: 16 euro
- current stock price: 8 euro
- best guess of how long this will last: one year

For an investment horizon of 10 years, this would mean:
- one year without profits during the pandemic
- profits of the following 4 years would be used to make up the losses of the pandemic year (4 x 2,5 billion profits = 10 billion in losses)
- then 5 years where dividend/share would be twice as much as it was in pre-pandemic times (because you buy them now at 50 % discount and earnings are assumed to be back to pre-pandemic times)

For Lufthansa the pricing seems to be spot on :D

Edit for the fun of it:
Volkswagen.

-current daily losses: 280 million euro
- pre-pandemic yearly profits: 20 billion
- pre-pandemic stock price: 180 euro
- currents stock price: 130 euro
- best guess of how long this will last: 9 months (cause people will start buying cars before they are allowed to fly around the world again)

For an investment horizon of 10 years, this would mean:
- one year without profits during the pandemic
- profits of the following 3 years and 10 months would be used to make up the losses of the 9 months of losses during the pandemic
- then 5 years and two months where dividend/share would be 1,38 X pre-pandemic dividend/share (because you buy them now at 28 % discount and earnings are assumed to be back to pre-pandemic times)

Under these assumptions, the return for buying Volkswagen now would be only 70 % of the expected return before the pandemic started. Maybe the market expects the losses for Volkswagen to be smaller ones the factories open again soon. I dont know. But at least it doesn´t seem to be an unreasonably high price compared to pre-pandemic times.

Would be very interesting if someone could find an example of a company that seems to be oddly valued compared to pre-pandemic times. Some of the members that are way more knowledgable than I am often suggest to look under hood of what we are buying and discussing. So let´s look under hood :D
Last edited by TheoLeo on Wed Apr 29, 2020 3:43 pm, edited 2 times in total.
savered123
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Re: What explains the continued rise in equities?

Post by savered123 »

Schlabba wrote: Wed Apr 29, 2020 12:09 pm The stock market is not the economy.

https://www.youtube.com/watch?v=0ECqDaPjjV0
Why are you a dividend investor? :sharebeer
shelanman
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Re: What explains the continued rise in equities?

Post by shelanman »

The short version is what it always is: the market moves based on changes in the aggregate opinion of the future.

In this instance, there are a few things.

For one, look at a graph of VIX. VIX is a goofy thing to speculate in, but it's a really useful stat after-the-fact. During Feb/Mar, VIX shot up like a rocketship. This is because the markets were actually becoming occasionally illiquid as everybody tried to be on the same side of trades all the time.

This got so bad that, at one point Fidelity brokerage suspended their market making activities in **US Treasuries**!

Thus, the price of almost every asset just collapsed as fast as the market could clear. Many assets might have actually gone to zero without fed intervention keeping the basic plumbing of the market operating.

Thats what was going on on those couple of days where VIX spiked above 80.

Then things settled in. They stopped getting radically worse each day. The market continued to decline a little, or be very choppy, bit VIX started meandering down toward 50, which is still crazy high, but not "markets stop working" high.

Then there was a really big bounce, because the decline was steeper than the circumstances warranted -- some of the decline was the "real economy" crashing, and some was the market infrastructure coming unstuck. One the market started clearing smoothly, prices went back up to levels that reflected people's actual views on our economic future.

Then the FED intervened, and Congress spent an entire extra 2 years' worth of budget it only a few weeks, and so prices of everything started going up. (If it weren't for oil collapsing to zero, inflation would be crazy high right now -- food prices up double-digit percent in 60 days)

Now, there are signs that some states, at least, don't intend the lockdowns to be permanent. Even in states where "you're in there forever" is the official plan, protests and civil disobedience both threaten the lockdown regimes, the virus itself is no longer worsening, progress on treatments and vaccines are better than expectations (though still terrible).

On top of all of that, the lockdowns and government interventions heavily favor large institutions, which can afford to wait out the crisis, and will be able to buy up failing competitors for peanuts -- if it means keeping everyone fed, governments are more willing than ever to ignore anti-trust.

All of that is combining to increase the number of US dollars people are.willing to pay to own a piece of the world's largest and most profitable companies.
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Re: What explains the continued rise in equities?

Post by Flashes1 »

Jozxyqk wrote: Wed Apr 29, 2020 1:53 pm
nisiprius wrote: Wed Apr 29, 2020 12:50 pm "Who can explain it? Who can tell you why?
Fools give you reasons; wise men never try."
--Oscar Hammerstein, "Some Enchanted Evening," from South Pacific.
BernardShakey wrote: Wed Apr 29, 2020 1:17 pm A lot of the people on this particular thread claim to know quite a bit.
Seriously. Remarkable to see so many posters claiming to understand this wild rise.

Note to OP: these posters have absolutely no idea. I'm confident that not a single one of them, if asked on March 23, 2020, would have had any inkling that the S&P 500 would be nearing 3000 in April.
I think it's more of posters being able to explain what's ALREADY happened; not being able to explain what's going to happen in the future.
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canadianbacon
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Re: What explains the continued rise in equities?

Post by canadianbacon »

7eight9 wrote: Wed Apr 29, 2020 1:10 pm And the companies that tried Work From Home and found out it works will likely continue to embrace it --- with less expensive employees. If one isn't needed in the office why are they needed in the same time zone?
I don’t buy it. Was tried already in 1999-2005, didn’t work well for many companies. The savings are more likely to be in office space, but you want your remote workers to be reachable in business hours.
Bulls make money, bears make money, pigs get slaughtered.
Elysium
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Re: What explains the continued rise in equities?

Post by Elysium »

TheoLeo wrote: Wed Apr 29, 2020 12:37 pm
Elysium wrote: Wed Apr 29, 2020 12:29 pm op,

That's because you are not understanding how the stocks market is pricing future earnings. It's a given than earnings for 2020 is going be bad, negative, but 2021 is not going to be same, better. Taking out 1 year of earnings is not going to do anything for most large corporations, when you are looking at 10 year earnings, and the stock value is priced for future earnings involving many years. The stock valuation doesn't change very much for most companies if you simply take out 2020 earnings.
Is it really "just one year of earnings gone"? I would say the cost of this shutdown depends on how much cash companies have to burn through to generate profits. If the fixed costs of running a company are 10 X of profits, then a year of zero earnings but continuing costs would cancel out 10 years of profits.
That's not how it works. Companies do not operate on 10 years of losses, just because they had a bad quarter or two, even that doesn't meant all of them are having bad quarter, some are having better than usual due to the rise in digital activity. It's at best a year of earnings, that is what market has priced, and the expectation is it gets compensated in 2021. I do think so too, there is a lot of pent up demand with consumers eager to go out and spend again.
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CyclingDuo
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Re: What explains the continued rise in equities?

Post by CyclingDuo »

bigskyguy wrote: Wed Apr 29, 2020 11:59 am I am trying to get my head around the recent and rapid rise in equities over the last few weeks. In the face of what can only be described as brutal economic conditions worldwide, why in the world should equities be priced for perfection? And the only logical reason that I can surmise is that when it comes to future returns, nothing else seems better. For me, the only logical conclusion is that forward earnings, be they from stocks, fixed income investments, or real investments, should of necessity be dismal. Strikes me that all indicators suggest economic stagnation for as far as the eye can see. There are no good investments for future returns, just less bad ones.
I would really appreciate to hear from each and every one of you on this forum how you see this present moment?
You want to hear from each and every one of us on this forum on how we see this present moment? Hmmm....looks like that would be from 95,148 current forum members. Good luck assembling the masses and reading all of the responses. :beer

In the meantime, follow along via video each week as the world turns:

https://www.youtube.com/watch?v=n-4-PgqC1Y4

At least Chris provides some perspective and puts things into context, along with others such as Joe Fahmy, Josh Brown, etc... .

For those of us still in our decades of accumulation, staying on course with our regular contributions into our investments and chosen AA out of each paycheck - be that weekly, bi-weekly, or monthly through thick and thin seems to be about all we need to focus on for our future.

CyclingDuo
"Save like a pessimist, invest like an optimist." - Morgan Housel
Teague
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Re: What explains the continued rise in equities?

Post by Teague »

I firmly believe that there are three main reasons which explain the current market behavior.

Unfortunately, I have no idea what they might be.
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bigskyguy
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Re: What explains the continued rise in equities?

Post by bigskyguy »

Well I appreciate the comments. Now let’s take today’s movement approaching a 3% rise in the Dow and the S&P. It’s certainly not driven by earnings reports, or economic advance, or inexpensive options, or new discoveries (the remdesivir info is very preliminary at best) or a dramatic improvement in economic outlook, or any of a myriad number of economic, health, international, or business advances. I am left with the sense that, as Ben Graham once said that the market is short term a voting machine by a small number of individuals who have agendas that are decoupled from the economy. For the majority of us who have a long term perspective, I find that very unfortunate.
TheoLeo
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Re: What explains the continued rise in equities?

Post by TheoLeo »

Elysium wrote: Wed Apr 29, 2020 3:28 pm
TheoLeo wrote: Wed Apr 29, 2020 12:37 pm
Elysium wrote: Wed Apr 29, 2020 12:29 pm op,

That's because you are not understanding how the stocks market is pricing future earnings. It's a given than earnings for 2020 is going be bad, negative, but 2021 is not going to be same, better. Taking out 1 year of earnings is not going to do anything for most large corporations, when you are looking at 10 year earnings, and the stock value is priced for future earnings involving many years. The stock valuation doesn't change very much for most companies if you simply take out 2020 earnings.
Is it really "just one year of earnings gone"? I would say the cost of this shutdown depends on how much cash companies have to burn through to generate profits. If the fixed costs of running a company are 10 X of profits, then a year of zero earnings but continuing costs would cancel out 10 years of profits.
That's not how it works. Companies do not operate on 10 years of losses, just because they had a bad quarter or two, even that doesn't meant all of them are having bad quarter, some are having better than usual due to the rise in digital activity. It's at best a year of earnings, that is what market has priced, and the expectation is it gets compensated in 2021. I do think so too, there is a lot of pent up demand with consumers eager to go out and spend again.
A few posts upstream I provided two examples of how I estimate the effect of the currents losses on future returns. Could you maybe tell me why this approach doesn´t work? Don´t see the mistake yet :confused
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Mountain Doc
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Re: What explains the continued rise in equities?

Post by Mountain Doc »

bigskyguy wrote: Wed Apr 29, 2020 3:46 pm I am left with the sense that, as Ben Graham once said that the market is short term a voting machine by a small number of individuals who have agendas that are decoupled from the economy. For the majority of us who have a long term perspective, I find that very unfortunate.
If you have a long term perspective, why do you concern yourself with the daily movements? They are irrelevant to your stated goals.
averagedude
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Re: What explains the continued rise in equities?

Post by averagedude »

Trillions of dollars and right now there are some people at the lower salary range that are making the most money they have ever made in their life without lifting a finger. When this is over, investors are anticipating these people and others going on massive shopping sprees. There is a saying on Wall Street, "Never fight the fed".
whereskyle
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Re: What explains the continued rise in equities?

Post by whereskyle »

bigskyguy wrote: Wed Apr 29, 2020 3:46 pm Well I appreciate the comments. Now let’s take today’s movement approaching a 3% rise in the Dow and the S&P. It’s certainly not driven by earnings reports, or economic advance, or inexpensive options, or new discoveries (the remdesivir info is very preliminary at best) or a dramatic improvement in economic outlook, or any of a myriad number of economic, health, international, or business advances. I am left with the sense that, as Ben Graham once said that the market is short term a voting machine by a small number of individuals who have agendas that are decoupled from the economy. For the majority of us who have a long term perspective, I find that very unfortunate.
I appreciate the sentiment, but practically speaking, the value of the market is centered in very few companies, and many of those companies, we know, are not only going to endure this but may actually benefit from this. This is the magic of a total-market index fund. Much of the money in the market will be redirected to the giants that are simultaneously growing and stable even as the "economy as a whole" suffers. Amazon hit a new high. Why? Because the market adjusts to new realities (or I should say probabilities), and the new reality favors amazon even more than it did a couple months ago. If you're worried about liquidity in the market going forward, the fed took care of that and will likely take the same action again if we see another market crash due to bad Q2 earnings. (I doubt we see another crash). I think we should be worried about a lot of people given this economic disaster. But we shouldn't worry about the big-tech megacaps dominating our index funds. They're fine. If they are even more fine as a result of this, my total-market index fund will reflect that, so I see no reason to worry about my investments even though I worry about the people affected by this. In my view, chaos results in redistribution. It's a zero-sum game, and there indeed appears to be no alternative. That's why you own the haystack.
"I am better off than he is – for he knows nothing and thinks that he knows. I neither know nor think that I know." - Socrates. "Nobody knows nothing." - Jack Bogle
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