Why is the stock market up? [thread multi-merge]

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protagonist
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Why is the stock market up? [thread multi-merge]

Post by protagonist » Thu May 07, 2020 6:13 pm

[6/2/20 note: following are four or more merged threads on this identical topic. You can follow specific threads by looking at post titles - admin alex]

This strikes me as a pretty good analysis, but I would like to hear comments from those more versed in economics than I am.

https://www.vox.com/covid-19-coronaviru ... ome-powell

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Re: "The economy is in free fall. So why isn't the stock market?"

Post by Kookaburra » Thu May 07, 2020 6:26 pm

Three reasons for the disconnect:

1. The market (which is forward looking) is overly optimistic about how quickly things will return to normal.

2. The Fed has effectively de-risked equities with its flooding of $.

3. There is no alternative.

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Re: "The economy is in free fall. So why isn't the stock market?"

Post by csmath » Thu May 07, 2020 6:34 pm

Kookaburra wrote:
Thu May 07, 2020 6:26 pm
Three reasons for the disconnect:

1. The market (which is forward looking) is overly optimistic about how quickly things will return to normal.

2. The Fed has effectively de-risked equities with its flooding of $.

3. There is no alternative.
You missed the most important one...

1a. The market is not the economy.
Stef wrote:
Thu Apr 23, 2020 5:09 am
The Stock Market vs. The Economy
https://www.youtube.com/watch?v=0ECqDaPjjV0
It is easy for investors to see economic news, like unemployment or GDP data, and get worried or excited about the impact that it will have on their investments. But there is something that many investors don’t realize. The stock market is not the economy, and the economy is not the stock market.

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Re: "The economy is in free fall. So why isn't the stock market?"

Post by SimpleGift » Thu May 07, 2020 6:34 pm

The U.S. stock market is just reflecting the baseline recovery that's now expected in many economic circles. Vanguard's Joe Davis has a recent article that outlines and reflects this consensus economic viewpoint:
The big risk for the stock market is if things don't turn out quite so rosy — e.g., a second wave of the virus outbreak in the Fall, an effective vaccine that doesn't materialize, consumers that are significantly more reluctant to spend than before the virus, etc. But the "expected' recovery as outlined in the Vanguard article pretty much explains the recent stock market behavior, in my view.

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Re: "The economy is in free fall. So why isn't the stock market?"

Post by Kookaburra » Thu May 07, 2020 6:44 pm

csmath wrote:
Thu May 07, 2020 6:34 pm
You missed the most important one...

1a. The market is not the economy.
This concept is implicit in my response.

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Re: "The economy is in free fall. So why isn't the stock market?"

Post by siamond » Thu May 07, 2020 6:47 pm

This was the most insightful part of the article, I think... :shock:
A Goldman Sachs associate provided a variety of detailed explanations, but then offered a caveat, “If I’m being dead-### honest, though, nobody knows what’s really going on.”

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Re: "The economy is in free fall. So why isn't the stock market?"

Post by stocknoob4111 » Thu May 07, 2020 6:52 pm

I guess the question is why is it different this time compared to '01, '08 and other past downturns where the economy tanked and so did the stock market. And another aspect is why did the stock market nosedive 40% in March but suddenly come back now? If anything things are even worse now than they were in March.

My guess is that the market is just mispriced and will adjust in the next few quarters... when investors realize that the market has hit a ceiling at SPX 2800-2950 and not going up sentiment is going to sour and the market will go back down. Just my speculation of course.

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Re: "The economy is in free fall. So why isn't the stock market?"

Post by firebirdparts » Thu May 07, 2020 6:59 pm

stocknoob4111 wrote:
Thu May 07, 2020 6:52 pm
I guess the question is why is it different this time compared to '01, '08 and other past downturns where the economy tanked and so did the stock market.
This is an intelligent question, and honestly, a lot of responses have been condescending. I expect you might get some more. But the key thing is somebody is buying at these prices. Real people somewhere. Buyers got a much better deal in 09.
A fool and your money are soon partners

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Re: "The economy is in free fall. So why isn't the stock market?"

Post by zaboomafoozarg » Thu May 07, 2020 7:01 pm

The disconnect is unexpected and I think about switching from 75/25 to 25/75 just about every day.

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Re: "The economy is in free fall. So why isn't the stock market?"

Post by LadyGeek » Thu May 07, 2020 7:10 pm

From: Subject: HEDGEFUNDIE's excellent adventure Part II: The next journey

"The stock market is not the economy. The economy is not the stock market."

This video provides an explanation: The Stock Market vs. The Economy, by Ben Felix.
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Re: "The economy is in free fall. So why isn't the stock market?"

Post by bligh » Thu May 07, 2020 7:11 pm

Kookaburra wrote:
Thu May 07, 2020 6:26 pm
Three reasons for the disconnect:

1. The market (which is forward looking) is overly optimistic about how quickly things will return to normal.

2. The Fed has effectively de-risked equities with its flooding of $.

3. There is no alternative.
+1

This is basically my guess too. The fact is, I am trying to explain the market behaving in a way that to me appears to be totally irrational.

Though I haven't changed my investing behavior, and perhaps that is what the majority of investors are doing too. With interest rates as low as they are (solidly negative in real terms), I find myself considering the opposite of what I would have expected in this situation - I want to sell my bonds and load up on stocks!

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Re: "The economy is in free fall. So why isn't the stock market?"

Post by abuss368 » Thu May 07, 2020 7:12 pm

protagonist wrote:
Thu May 07, 2020 6:13 pm
This strikes me as a pretty good analysis, but I would like to hear comments from those more versed in economics than I am.

https://www.vox.com/covid-19-coronaviru ... ome-powell
The stock market is not the economy! Vanguard has some good research reports on this if you are interested on their website.

That has been one of the mysteries about international investing. Many international economies are not good and the stock markets are not providing returns.
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Re: "The economy is in free fall. So why isn't the stock market?"

Post by whodidntante » Thu May 07, 2020 7:16 pm

It's not my intent to be political with the comment, only to describe reality as I see it. A lot of corporate, municipal, and private risk has been transferred to public risk. Therefore the markets have adjusted to the lower level of risk that remains.

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Re: "The economy is in free fall. So why isn't the stock market?"

Post by Robot Monster » Thu May 07, 2020 7:24 pm

SimpleGift wrote:
Thu May 07, 2020 6:34 pm
The U.S. stock market is just reflecting the baseline recovery that's now expected in many economic circles. Vanguard's Joe Davis has a recent article that outlines and reflects this consensus economic viewpoint:
The big risk for the stock market is if things don't turn out quite so rosy — e.g., a second wave of the virus outbreak in the Fall, an effective vaccine that doesn't materialize, consumers that are significantly more reluctant to spend than before the virus, etc. But the "expected' recovery as outlined in the Vanguard article pretty much explains the recent stock market behavior, in my view.
Speaking of risks, the Economist says the most overlooked risk is of a political backlash. "The slump will hurt smaller firms and leave the bigger corporate survivors in a stronger position, increasing the concentration of some industries that was already a problem before the pandemic. A crisis demands sacrifice and will leave behind a big bill. The clamour for payback will only grow louder if big business has hogged more than its share of the subsidies on offer."
https://amp.economist.com/leaders/2020/ ... ssion=true

A Edit: a good expression of a bear argument in this video...even if you don't watch all of it you can get a good idea...
https://m.youtube.com/watch?v=duIPZ1xeA5Y
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Re: "The economy is in free fall. So why isn't the stock market?"

Post by palaheel » Thu May 07, 2020 7:36 pm

I think the last 10 years have built up a reservoir of optimism. That will take some time to burn away. The economic news will eventually transform "recent memory" into pessimism, and then the true bear market will emerge.

In the depths of despair the true buying opportunities will emerge. Those who old through the dark days will be rewarded.

The current volatility is behavioral. The coming crash will be behavioral, too.

I hope I'm wrong.
Markets crash. Markets recover. Inflation takes your money FOREVER.

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Re: "The economy is in free fall. So why isn't the stock market?"

Post by SimpleGift » Thu May 07, 2020 7:45 pm

stocknoob4111 wrote:
Thu May 07, 2020 6:52 pm
I guess the question is why is it different this time compared to '01, '08 and other past downturns where the economy tanked and so did the stock market.
What's different is that we've been experiencing an "event driven" bear market (caused by a pandemic), as opposed to a hugely overvalued stock market in the 2001 tech crash, and a "structural" bear market in 2008-09 in which the world's financial system was on the brink of collapse. Before the outbreak, the market and economy were in fairly good shape.

Further, pandemics often have a start and a more or less predictable end, and once stock markets get a realistic idea of the scope and duration of the outbreak, historically they have recovered rather quickly. For more, see this recent Forum discussion: Event-Driven Bear Markets in U.S. History, 1835-2020.
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Re: "The economy is in free fall. So why isn't the stock market?"

Post by Fallible » Thu May 07, 2020 7:54 pm

protagonist wrote:
Thu May 07, 2020 6:13 pm
This strikes me as a pretty good analysis, but I would like to hear comments from those more versed in economics than I am.

https://www.vox.com/covid-19-coronaviru ... ome-powell
Nobel economist Paul Krugman wrote of this in his NYT column a week before the "Vox" article (even I could understand it!):
Well, whenever you consider the economic implications of stock prices, you want to remember three rules. First, the stock market is not the economy. Second, the stock market is not the economy. Third, the stock market is not the economy.

That is, the relationship between stock performance — largely driven by the oscillation between greed and fear — and real economic growth has always been somewhere between loose and nonexistent.
https://www.nytimes.com/2020/04/30/opin ... virus.html
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Re: "The economy is in free fall. So why isn't the stock market?"

Post by IndexCore » Thu May 07, 2020 10:26 pm

The first graph in that article shows the Fed spending versus the stock market - it's ridiculously cherry picked. The stock market follows the measurements on the left, while the Fed assets line follows the measurements on the right. The author has manipulated units until two lines overlap - it's not meaningful. Things like that tend to show me the person is detached from the data, which undercuts their message. It's probably better to read other articles on what's going on with the Fed, the economy and the stock market.

The article also assumes the economy is somehow newly damaged this week, compared to last week. People and businesses are both locked down, which is how it's been for weeks. That's not news. More people filing for unemployment is a direct result of COVID-19 and lock downs - it's not new information.

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Re: "The economy is in free fall. So why isn't the stock market?"

Post by tvubpwcisla » Thu May 07, 2020 10:35 pm

I think investors see big discounts in stocks right now, still trading down quite a bit from the all time highs. They also realize the virus will one day go away. There are many folks who consistently buy the market regardless of the news headlines that are out there because they realize in the long run the market will keep going up.
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Re: "The economy is in free fall. So why isn't the stock market?"

Post by protagonist » Thu May 07, 2020 11:01 pm

csmath wrote:
Thu May 07, 2020 6:34 pm

You missed the most important one...

1a. The market is not the economy.

Actually I have been aware of that disconnect for a long time. Which is part of what makes it nearly impossible to predict. I thought the article more or less addressed that but perhaps not....I admit to not reading it too carefully.
Last edited by protagonist on Thu May 07, 2020 11:06 pm, edited 1 time in total.

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Re: "The economy is in free fall. So why isn't the stock market?"

Post by 02nz » Thu May 07, 2020 11:01 pm

"The stock market isn't the economy." Well, obviously it's not. The stock market cares a lot more about companies' profits (and prospects for their future profits) than about the economy, which is measured in production or output (or at the company level, revenue). For a clear example of this, compare GM vs Tesla revenue, and then compare their market capitalizations.

That gives us a clue, I think, about why the stock market hasn't fallen as much as we might have expected from so much of the economy shutting down, or compared to the financial crisis of 2007-2009. The market's biggest sectors by market cap are now technology (24.4% of VTSAX), financials (17.4%), and health care (14.7%). While individual companies' fortunes will vary, broadly speaking I think it's safe to say these companies are expected to weather the economic downturn better than those in smaller (by market cap) sectors like retail, consumer goods, industrials, or energy. Stocks of companies in the financial sector aren't taking nearly the hit they did over a decade ago, in a crisis that was driven directly by the financial sector. And in the past decade, the economy and esp. profits have shifted (in relative terms) toward those sectors that now dominate by market cap. At the start of the financial crisis, the 2 biggest U.S. companies by market cap were ExxonMobil and GE. Today the two biggest (actually all of the top five) are tech companies.

That's not to say that the market won't fall further, but I think this is a big part of the explanation to the question posed by OP.
Last edited by 02nz on Thu May 07, 2020 11:06 pm, edited 1 time in total.

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Re: "The economy is in free fall. So why isn't the stock market?"

Post by anoop » Thu May 07, 2020 11:02 pm

There's only so much toilet paper you can buy before the trillions of dollars must be used to buy something, anything. And since stocks are the only thing that don't need any storage space (unlike oil and even gold), ...

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Re: "The economy is in free fall. So why isn't the stock market?"

Post by protagonist » Thu May 07, 2020 11:05 pm

palaheel wrote:
Thu May 07, 2020 7:36 pm
I think the last 10 years have built up a reservoir of optimism.
The last century has, actually. At least if you were not living in the 1930s, and not too many of us were.

I don't predict booms and crashes. I believe in chaos...I just wait and see what happens. I'm just a bozo on this bus.

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Re: "The economy is in free fall. So why isn't the stock market?"

Post by William Million » Thu May 07, 2020 11:15 pm

We've only been in this bear market recession for two months. I fear it has not run its course. Wan't 2008-09 something like 9 months?

I could be wrong but prefer to prepare for the worst.
Last edited by William Million on Thu May 07, 2020 11:18 pm, edited 1 time in total.

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Re: "The economy is in free fall. So why isn't the stock market?"

Post by Dude2 » Thu May 07, 2020 11:15 pm

The question is on everyone's mind. The defensive strategy should be to hang on and hold tight. We could still be in for a wild ride.

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Re: "The economy is in free fall. So why isn't the stock market?"

Post by 7eight9 » Thu May 07, 2020 11:59 pm

tvubpwcisla wrote:
Thu May 07, 2020 10:35 pm
I think investors see big discounts in stocks right now, still trading down quite a bit from the all time highs. They also realize the virus will might one day go away. There are many folks who consistently buy the market regardless of the news headlines that are out there because they realize in the long run the market will keep going up.
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Re: "The economy is in free fall. So why isn't the stock market?"

Post by Robot Monster » Fri May 08, 2020 7:18 am

The tension on Wall Street is how much longer U.S. stocks can diverge from the cataclysmic collapse in the global economy, posting gains amid the worst economic reports in history.
It’s JPMorgan vs. Citi as Wall Street Splits on Market Direction
https://t.co/PddBzVZBz2

Bonds & stocks are sending opposite signals. “I would say it’s the biggest disconnect I’ve seen between bonds and stocks in a long time. I think we need to be very mindful about what the bond market is telling us.”
Invesco Tells Stock Traders to Heed Red Flags From Bond Market
https://t.co/0Oo1kKtGbQ
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Re: "The economy is in free fall. So why isn't the stock market?"

Post by minimalistmarc » Fri May 08, 2020 7:40 am

Robot Monster wrote:
Fri May 08, 2020 7:18 am
The tension on Wall Street is how much longer U.S. stocks can diverge from the cataclysmic collapse in the global economy, posting gains amid the worst economic reports in history.
It’s JPMorgan vs. Citi as Wall Street Splits on Market Direction
https://t.co/PddBzVZBz2

Bonds & stocks are sending opposite signals. “I would say it’s the biggest disconnect I’ve seen between bonds and stocks in a long time. I think we need to be very mindful about what the bond market is telling us.”
Invesco Tells Stock Traders to Heed Red Flags From Bond Market
https://t.co/0Oo1kKtGbQ
Good thing I’m a long term investor and not a trader. Means I can ignore the confusing mixed messages from “experts” and just trust the markets to do their job.

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Re: "The economy is in free fall. So why isn't the stock market?"

Post by minimalistmarc » Fri May 08, 2020 7:40 am

Robot Monster wrote:
Fri May 08, 2020 7:18 am
The tension on Wall Street is how much longer U.S. stocks can diverge from the cataclysmic collapse in the global economy, posting gains amid the worst economic reports in history.
It’s JPMorgan vs. Citi as Wall Street Splits on Market Direction
https://t.co/PddBzVZBz2

Bonds & stocks are sending opposite signals. “I would say it’s the biggest disconnect I’ve seen between bonds and stocks in a long time. I think we need to be very mindful about what the bond market is telling us.”
Invesco Tells Stock Traders to Heed Red Flags From Bond Market
https://t.co/0Oo1kKtGbQ
Good thing I’m a long term investor and not a trader. Means I can ignore the confusing mixed messages from “experts” and just trust the markets to do their job.

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Re: "The economy is in free fall. So why isn't the stock market?"

Post by minimalistmarc » Fri May 08, 2020 7:42 am

William Million wrote:
Thu May 07, 2020 11:15 pm
We've only been in this bear market recession for two months. I fear it has not run its course. Wan't 2008-09 something like 9 months?

I could be wrong but prefer to prepare for the worst.
Good idea. Bogleheads are always prepared for the worst :sharebeer

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Re: "The economy is in free fall. So why isn't the stock market?"

Post by Coltrane75 » Fri May 08, 2020 8:10 am

William Million wrote:
Thu May 07, 2020 11:15 pm
We've only been in this bear market recession for two months. I fear it has not run its course. Wan't 2008-09 something like 9 months?

I could be wrong but prefer to prepare for the worst.
I agree with this sentiment. It's probably too early to be asking this question.

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Re: "The economy is in free fall. So why isn't the stock market?"

Post by ExPatKiwi » Fri May 08, 2020 8:20 am

Q: "The economy is in free fall. So why isn't the stock market?"
A: Irrational Exuberance.
Counting down to retirement on December 31st, 2024

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Re: "The economy is in free fall. So why isn't the stock market?"

Post by Faisal » Fri May 08, 2020 8:55 am

I was just about to post the same thing looking at the trends. I have a Master's in Economics and Law - deals specifically with politically economy, world trade and other stuff, so this stock market makes no senses to me. Mind you if you put 10 economists in a room you will get 11 different reasons for why something is happening.

The economic figures are bad. No just bad. But very very very bad. The world economy shrunk last quarter. It will shrink again this quarter and will shrink and quarter three from what the WB and IMF Are stating.. Secondly as my wife put it this pandemic has proven to companies which levels of middle management they can do without, so I expect more permanent layoffs over the summer and into the winter.

More layoffs, limited economic activity, equals less purchasing power, forces people to either cut on stuff or dip into savings which lowers demand, which leads to more cuts etc.

Basically even though the market is doing well right now, when the second wave comes its not going to do well at all and the economy will do worse. But as the boglehead philiopshy goes keep calm and stick to your strategy.

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Re: "The economy is in free fall. So why isn't the stock market?"

Post by protagonist » Fri May 08, 2020 9:39 am

Faisal wrote:
Fri May 08, 2020 8:55 am


Basically even though the market is doing well right now, when the second wave comes its not going to do well at all and the economy will do worse. But as the boglehead philiopshy goes keep calm and stick to your strategy.
I'm curious...given your expertise and your view on the economy going forward (I have no reason to doubt you), what have you done regarding your own portfolio? What percent is in stocks?

And if you believe that the market is due for a serious fall, why would you recommend sticking to the "Boglehead philosophy"? Given what you believe, that seems like the equivalent of betting on a horse you know will lose.

I stick to it because, as I mentioned above, I believe the markets are chaotic, and I have enough of a buffer in safe investments (or as safe as investments can be) that if I lose all my money that I have in the market it probably wouldn't have significant impact on my lifestyle (I am in my mid-60s and retired). Plus, if I sold all my stock (which seems like it would be the sensible thing to do if I was pretty convinced that the market was due for a crash), I would have to pay a LOT of tax on the gains. So I just let the chips fall as they may.

Please don't take my comments as critical...they are not. I accept that you probably know a lot more about this stuff than I do...I am no expert and never took a course in finance or economics. I am trying to understand your thinking (which coincides with that of many others on this site).

As in war or anything else really, sticking to a strategy only makes sense to me until one is presented with new information that no longer makes that strategy make sense. I am really just trying to understand the logic of what to me seems like knowingly going down with a sinking ship.

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Re: "The economy is in free fall. So why isn't the stock market?"

Post by livesoft » Fri May 08, 2020 9:46 am

Perhaps not mentioned yet: I think the vast majority of people who have filed for unemployment benefits are folks who don't invest and/or don't have retirement plans. Yes, some people who do have such plans are unemployed, but most of the unemployed are likely to be low wage earners without much savings and without much in the way of investments. That's what I think.

That is, the wealthy folks who have the resources to weather this recession (maybe soon to be depression) are not selling their investments because they don't need to just yet. There is money raining from heaven and it is also being used to prop up prices.
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Re: "The economy is in free fall. So why isn't the stock market?"

Post by protagonist » Fri May 08, 2020 9:48 am

Fallible wrote:
Thu May 07, 2020 7:54 pm

Nobel economist Paul Krugman wrote of this in his NYT column a week before the "Vox" article (even I could understand it!):
Well, whenever you consider the economic implications of stock prices, you want to remember three rules. First, the stock market is not the economy. Second, the stock market is not the economy. Third, the stock market is not the economy.

That is, the relationship between stock performance — largely driven by the oscillation between greed and fear — and real economic growth has always been somewhere between loose and nonexistent.
That's a great quote, Fallie. I like the part about "largely driven by the oscillation between greed and fear". It explains a lot, really. I want to remember that.

Though I have a lot of respect for Krugman, I don't really understand the last part about real economic growth being between "loose and non-existent".

At least superficially, it seems to me that the economy has grown by leaps and bounds since the Industrial Revolution, and especially since WW2....in fact frighteningly so as it makes us all susceptible to "recency bias", since such a rate of growth cannot be sustained forever.
Do you understand what led him to that conclusion, and if so, can you explain it to me?

Thanks.
Last edited by protagonist on Fri May 08, 2020 9:53 am, edited 1 time in total.

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Re: "The economy is in free fall. So why isn't the stock market?"

Post by onourway » Fri May 08, 2020 9:51 am

Only because it cannot be repeated enough - the stock market is not the economy.

To put this in more practical terms - the people and companies being hurt thus far by the shutdown are disproportionately not participants in the stock market. They are small, privately owned businesses and their employees who own little or no stock, statistically. My impression, both in my local life and online, is that people and companies who DO have a major interest in the stock market are not yet suffering. In fact for many of us, our incomes have gone UP because our expenses have gone way down, plus the government is sending us checks! The US stock market is disproportionately weighted towards large tech companies who have the capital to withstand this temporary disruption, and in fact many of them will come out of this stronger than ever.

Thinking that because your friends and neighbors who own restaurants, small contracting businesses, local shops, etc. are out of work that the stock market must follow is to fundamentally understand what companies constitute the majority of that market, and who owns most of the interest in those companies.

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Re: "The economy is in free fall. So why isn't the stock market?"

Post by onourway » Fri May 08, 2020 9:53 am

protagonist wrote:
Fri May 08, 2020 9:39 am
Faisal wrote:
Fri May 08, 2020 8:55 am


Basically even though the market is doing well right now, when the second wave comes its not going to do well at all and the economy will do worse. But as the boglehead philiopshy goes keep calm and stick to your strategy.
I'm curious...given your expertise and your view on the economy going forward (I have no reason to doubt you), what have you done regarding your own portfolio? What percent is in stocks?

And if you believe that the market is due for a serious fall, why would you recommend sticking to the "Boglehead philosophy"? Given what you believe, that seems like the equivalent of betting on a horse you know will lose.

I stick to it because, as I mentioned above, I believe the markets are chaotic, and I have enough of a buffer in safe investments (or as safe as investments can be) that if I lose all my money that I have in the market it probably wouldn't have significant impact on my lifestyle (I am in my mid-60s and retired). Plus, if I sold all my stock (which seems like it would be the sensible thing to do if I was pretty convinced that the market was due for a crash), I would have to pay a LOT of tax on the gains. So I just let the chips fall as they may.

Please don't take my comments as critical...they are not. I accept that you probably know a lot more about this stuff than I do...I am no expert and never took a course in finance or economics. I am trying to understand your thinking (which coincides with that of many others on this site).

As in war or anything else really, sticking to a strategy only makes sense to me until one is presented with new information that no longer makes that strategy make sense. I am really just trying to understand the logic of what to me seems like knowingly going down with a sinking ship.
The problem is that your particular viewpoint is often heavily weighted by your own personal situation and biases and the market as a whole may not agree with you. It is far easier, and historically far safer, to simply ride the market up and down. You should not have money you expect to need in the next 10 years in the market anyhow, or if you do, you should already be at an asset allocation that allows you to take the needed withdrawals through periods like this with a minimum of damage.

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willthrill81
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Re: "The economy is in free fall. So why isn't the stock market?"

Post by willthrill81 » Fri May 08, 2020 10:01 am

siamond wrote:
Thu May 07, 2020 6:47 pm
This was the most insightful part of the article, I think... :shock:
A Goldman Sachs associate provided a variety of detailed explanations, but then offered a caveat, “If I’m being dead-### honest, though, nobody knows what’s really going on.”
Indeed.

I find it interesting and a bit amusing that many believe that large groups of clueless people can better predict what will happen over the long-term than a single clueless person.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

fatFIRE
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Re: "The economy is in free fall. So why isn't the stock market?"

Post by fatFIRE » Fri May 08, 2020 10:03 am

I mean it's truly ridiculous that we just have a 15% unemployment rate and my portfolio increased this morning...

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Re: "The economy is in free fall. So why isn't the stock market?"

Post by Robot Monster » Fri May 08, 2020 10:07 am

Faisal wrote:
Fri May 08, 2020 8:55 am
It will shrink again this quarter and will shrink in quarter three from what the WB and IMF Are stating...when the second wave comes its not going to do well at all and the economy will do worse.
I see you have forecasts that seemingly run contrary to what is priced in...

"Will shrink In quarter three"
"In order to believe today's levels you really need to believe we're going to have a sharp v-shaped recovery in earnings starting in the third and fourth quarters of this year and certainly in 2021." PGIM CEO David Hunt

"When the second wave comes"
It is entirely possible that there will be a second wave of infections, though am I correct to say the market is not pricing in very high odds of this?

Let me back up for a second. The question at hand is why is the stock market is high when the economy is in freefall, which I'm taking really to say, what is the stock market pricing in. So, this, what the stock market is pricing in is what I'm trying to grapple with here. (Also trying to grapple with how this is actionable, but that's perhaps out of the scope of this thread...?)
"I HAVE THE POWER!!!" ~ He-Man

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Re: "The economy is in free fall. So why isn't the stock market?"

Post by Faisal » Fri May 08, 2020 10:11 am

protagonist wrote:
Fri May 08, 2020 9:39 am
Faisal wrote:
Fri May 08, 2020 8:55 am


Basically even though the market is doing well right now, when the second wave comes its not going to do well at all and the economy will do worse. But as the boglehead philiopshy goes keep calm and stick to your strategy.
I'm curious...given your expertise and your view on the economy going forward (I have no reason to doubt you), what have you done regarding your own portfolio? What percent is in stocks?

And if you believe that the market is due for a serious fall, why would you recommend sticking to the "Boglehead philosophy"? Given what you believe, that seems like the equivalent of betting on a horse you know will lose.

I stick to it because, as I mentioned above, I believe the markets are chaotic, and I have enough of a buffer in safe investments (or as safe as investments can be) that if I lose all my money that I have in the market it probably wouldn't have significant impact on my lifestyle (I am in my mid-60s and retired). Plus, if I sold all my stock (which seems like it would be the sensible thing to do if I was pretty convinced that the market was due for a crash), I would have to pay a LOT of tax on the gains. So I just let the chips fall as they may.

Please don't take my comments as critical...they are not. I accept that you probably know a lot more about this stuff than I do...I am no expert and never took a course in finance or economics. I am trying to understand your thinking (which coincides with that of many others on this site).

As in war or anything else really, sticking to a strategy only makes sense to me until one is presented with new information that no longer makes that strategy make sense. I am really just trying to understand the logic of what to me seems like knowingly going down with a sinking ship.
Changed nothing because I have a very simple investment strategy - the three fund portfolio - and believe in a very simple economic principal. Economic activity is cyclical. There will be booms and there will be recessions. The time of each changes and the gap between each changes, but you can not have an infinite boom or an infinite recession.

My investment strategy is a 3 fund portfolio which is VTI VXUS and BND. No changes and I have a 80-20 allocation. I am happy being in the median with everyone else because I do not - yet - have a need to make millions or be top of the cutting edge of investment earnings and returns. And I come from a developing country and I personally believe in some very developing country views. My investments are like the icing on my cake. My cake is my savings. It is the liquid cash I have in my bank account that I can access for any reason. I also have a smaller separate emergency fund as me and my wife have aging parents with health issues.

But I will say this I know nothing and I am not more knowledgable than you or anybody else here. Just because I have studied economics does not mean I can predict the future as economics is built on a very idiotic - in my opinion - principal. Ceteris paribus, which basically means if all else remains eqyal or the same and that never happens in the real world.

I can analyze the information and make an informed guess because that is what economists do. There could be a vaccine discovered in 3 months that works wonders and then the economy will boom as everyone will get it and no more social distancing, no more lay offs and everyone is happy. Or we have second wave never find a vaccine and our way of life is changed forever. Drastic views but equally possible if everything else remains the same.

I hope this helps and I am happy to elaborate more if you wish.

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protagonist
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Re: "The economy is in free fall. So why isn't the stock market?"

Post by protagonist » Fri May 08, 2020 10:13 am

onourway wrote:
Fri May 08, 2020 9:53 am
protagonist wrote:
Fri May 08, 2020 9:39 am
Faisal wrote:
Fri May 08, 2020 8:55 am


Basically even though the market is doing well right now, when the second wave comes its not going to do well at all and the economy will do worse. But as the boglehead philiopshy goes keep calm and stick to your strategy.
I'm curious...given your expertise and your view on the economy going forward (I have no reason to doubt you), what have you done regarding your own portfolio? What percent is in stocks?

And if you believe that the market is due for a serious fall, why would you recommend sticking to the "Boglehead philosophy"? Given what you believe, that seems like the equivalent of betting on a horse you know will lose.

I stick to it because, as I mentioned above, I believe the markets are chaotic, and I have enough of a buffer in safe investments (or as safe as investments can be) that if I lose all my money that I have in the market it probably wouldn't have significant impact on my lifestyle (I am in my mid-60s and retired). Plus, if I sold all my stock (which seems like it would be the sensible thing to do if I was pretty convinced that the market was due for a crash), I would have to pay a LOT of tax on the gains. So I just let the chips fall as they may.

Please don't take my comments as critical...they are not. I accept that you probably know a lot more about this stuff than I do...I am no expert and never took a course in finance or economics. I am trying to understand your thinking (which coincides with that of many others on this site).

As in war or anything else really, sticking to a strategy only makes sense to me until one is presented with new information that no longer makes that strategy make sense. I am really just trying to understand the logic of what to me seems like knowingly going down with a sinking ship.
The problem is that your particular viewpoint is often heavily weighted by your own personal situation and biases and the market as a whole may not agree with you.

In my case that is definitely true (since, 1. I believe that the market basically behaves like any other complex non-linear system, 2. I am not an expert and I know it, so I try (?!) not to let my personal biases confound my thinking, and 3. I can afford to lose what I have in the market. I wouldn't like it, but I can afford it.

Faisal, on the other hand, is an expert (advanced degrees in both finance and economics, vs. me who has never taken a course in either), and what he says truly makes a lot of sense. Thus I am trying to understand his logic in sticking to a strategy that he believes is more likely to lose than win. He is hardly alone in doing so.

I don't understand why anybody would place a bet on something if they believed they had more than a 50% chance of losing. Actually, I take that back,,,, I can understand going to Las Vegas and betting against the house, if you only use money you can afford to lose (come to think of it, maybe that is what I am doing). Las Vegas is warm and it is a vacation and some people find gambling fun and exciting.
But with money that people cannot afford to lose, the idea of putting a huge portion of everything I owned on the line, even if I believed the odds were just 51% or 50.1% against me, seems foolish. There is no credible, scientifically justifiable reason to assume that a crash will bounce back within one's lifetime other than recency bias.

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Re: "The economy is in free fall. So why isn't the stock market?"

Post by willthrill81 » Fri May 08, 2020 10:14 am

fatFIRE wrote:
Fri May 08, 2020 10:03 am
I mean it's truly ridiculous that we just have a 15% unemployment rate and my portfolio increased this morning...
To put it into further perspective, stocks were meaningfully lower in December of 2018 than they are now. Think about how utterly ridiculous that is.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: "The economy is in free fall. So why isn't the stock market?"

Post by onourway » Fri May 08, 2020 10:18 am

protagonist wrote:
Fri May 08, 2020 10:13 am

...I don't understand why anybody would place a bet on something if they believed they had more than a 50% chance of losing. Actually, I take that back,,,, I can understand going to Las Vegas and betting against the house, if you only use money you can afford to lose (come to think of it, maybe that is what I am doing). Las Vegas is warm and it is a vacation and some people find gambling fun and exciting.
But with money that people cannot afford to lose, the idea of putting a huge portion of everything I owned on the line, even if I believed the odds were just 51% or 50.1% against me, seems foolish. There is no credible, scientifically justifiable reason to assume that a crash will bounce back within one's lifetime other than recency bias.
How do we stand to lose by remaining invested? I do not have money invested in the market that I need immediately, and I do not anchor myself to any particular dollar value my statements ever show. I expect that markets will be cyclical and that my account value will vary. Taking money out of the market and waiting on the sidelines is extremely stressful, and it also means that I will likely miss most of the best investing months over a career.

Again, how do I stand to lose here?

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Re: "The economy is in free fall. So why isn't the stock market?"

Post by vitaflo » Fri May 08, 2020 10:21 am

onourway wrote:
Fri May 08, 2020 9:51 am
Only because it cannot be repeated enough - the stock market is not the economy.

To put this in more practical terms - the people and companies being hurt thus far by the shutdown are disproportionately not participants in the stock market. They are small, privately owned businesses and their employees who own little or no stock, statistically. My impression, both in my local life and online, is that people and companies who DO have a major interest in the stock market are not yet suffering. In fact for many of us, our incomes have gone UP because our expenses have gone way down, plus the government is sending us checks! The US stock market is disproportionately weighted towards large tech companies who have the capital to withstand this temporary disruption, and in fact many of them will come out of this stronger than ever.

Thinking that because your friends and neighbors who own restaurants, small contracting businesses, local shops, etc. are out of work that the stock market must follow is to fundamentally understand what companies constitute the majority of that market, and who owns most of the interest in those companies.
While I understand the point here, it ignores the fact that small businesses and non-stock owners do indirectly influence the companies in the market. Small businesses purchase goods from large corporations, as do the non-stock owning public. Eventually that lack of demand does trickle upwards.

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Re: "The economy is in free fall. So why isn't the stock market?"

Post by protagonist » Fri May 08, 2020 10:31 am

Faisal wrote:
Fri May 08, 2020 10:11 am
I am happy being in the median with everyone else because I do not - yet - have a need to make millions or be top of the cutting edge of investment earnings and returns. And I come from a developing country and I personally believe in some very developing country views. My investments are like the icing on my cake. My cake is my savings. It is the liquid cash I have in my bank account that I can access for any reason.ns the same.

I hope this helps and I am happy to elaborate more if you wish.
Yes, that explains a lot, thank you. I sort of get it. I am from the USA but I have spent a fair amount of time living in developing countries and doing so has also had a profound effect on my own perspective on life. From what you say above I think that you and I think more or less alike about this.

On the other hand, there are many here who have a much different perspective (no value judgement here, just different). "Stay the course" I think is a good principle when not taken religiously. To me, "stay the course" means do not react out of panic...it does not mean do not change if and when it makes more sense to do so. Part of the key to success in life (not just investing) is to have a flexible enough mind to process new information as it is presented to you and adjust one's strategy accordingly- getting stuck in old ways if they no longer make sense is a recipe for defeat.

In the 90s I thought I was a lot smarter than I am. I invested in managed funds and individual stocks. I developed a "system" that made a lot of sense to me. When I realized I was not beating the market, and figured out why (we here all know the reasons...high expense ratios, betting against institutions with more knowledgeable people and more resources than I could possibly beat, etc.), if I believed in my system enough that I "stayed the course" regardless of the new information I was presented with, I would be a lot poorer than I am today.

"I was so much older then. I'm younger than that now." - Bob Dylan.

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Re: "The economy is in free fall. So why isn't the stock market?"

Post by Candor » Fri May 08, 2020 10:36 am

zaboomafoozarg wrote:
Thu May 07, 2020 7:01 pm
The disconnect is unexpected and I think about switching from 75/25 to 25/75 just about every day.
I haven't and I won't but I'd be lying if I said I don't think about pulling out 25% of my pf every day this market keep going up and I'm currently only at 55% equities. I've been thinking that for a while now and the market continues to plod along which is one of the many reasons I don't give into this temptation.

I have bought into the decline (started at approx 50% equites) but I wasn't expecting this fast of a recovery so it's making me a little uncomfortable.

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Re: "The economy is in free fall. So why isn't the stock market?"

Post by fallingeggs » Fri May 08, 2020 10:36 am

I don't think it is terribly that difficult to explain. People are hopeful that (1) we're through the worst and it's only up from here and (2) the Fed + Government's measures in place will fairly successfully bridged the unemployment gap so millions of people don't go into default.

If those two turn out to be true, then the stock market seems right because the economy, while it shrank for a few months, will get back growing in May. A short recession, sort of like the whole country getting hit by a hurricane at once, really wouldn't be a big deal in the long term.

Or this fall could be a repeat of the spring, unemployment stays very high, the gap is too large to bridge with monetary and fiscal stimulus and things start to domino out of control. Then we're circa winter 2007/8.

No clue which path we're heading down, but I'd certainly prefer the first. And I can reasonably see the collective market thinking this is the most reasonable outcome given all the info we currently have. Everyone will get more data as the world economies starts to open up.

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Re: "The economy is in free fall. So why isn't the stock market?"

Post by Jim180 » Fri May 08, 2020 10:42 am

The market feels this will all be behind us in a few months. It is clearly not pricing in a second wave of the virus later this year which could cause another shock to the economy.

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