6 ms·

No matter what the official criteria for “correction” is, that word just doesn’t feel right. “Correction” implies it’s a fix for some insignificant thing, like

by orev 7y ago

No matter what the official criteria for “correction” is, that word just doesn’t feel right. “Correction” implies it’s a fix for some insignificant thing, like over exuberance/a bubble. But that’s not what’s going on here. One of the biggest manufacturing economies has essentially shut down. Companies are already warning about significant impacts on quarterly earnings. Those are actual, real things — not people just realizing they got a little too excited.

deleted 7y ago
[deleted]
all_blue_chucks 7y ago
"Correction" refers to the idea that the market was previously overpriced by 10%. In this case one would say it was not pricing in the risk of the virus correctly, until now. If it falls 20% from the high, they stop calling it a correction and start calling it a bear market. Of course, the market went up thirty freaking percent last year to put this price action in perspective.
- opportune 7y ago
  Saying the market went up 30% last year is a little deceptive. There was a sharp correction in December right before the year started and it was down like 15-20% from the high in September
- notduncansmith 7y ago
  Yeah, my bet is that the virus is just helping the market get back to normal by getting people to start taking their values seriously. The market has been seriously inflated for a while. It is interesting, in light of the financial situation, how China and the US are handling the virus. Too attached to the status quo and trying to prevent a more serious correction by downplaying it? Or deliberately under-responding for other reasons?
  - blaser-waffle 7y ago
    > Too attached to the status quo and trying to prevent a more serious correction by downplaying it? Or deliberately under-responding for other reasons? Conspiracy territory, but if I'm not in China I'm quietly hoping it gets crazy for another month or two, drives stock prices down further, and then buy at low rates. The constant "we don't know what's really going on!" doom and gloom articles make me think they're either pandering desperately for clickbate, or trying to drive the market further down (maybe both?).
    - notduncansmith 7y ago
      > Conspiracy territory True, I should assume incompetence before malice. Something about it just feels too calculated to me. I guess we’ll just have to wait and see shrug
asdfasgasdgasdg 7y ago
Something that's never totally clear to me, either on the upside or the downside: say the largest economy in the world is shut down. Even say it stays that way for three or four months. Does that actually mean that the US' public capital has dropped ten percent in value? It's my very strong suspicion that in two years we will be chugging along again as if this never happened. Why is 10% the right number to contract in that situation? (In case you can't guess, I'm still 100% long.)
- AnimalMuppet 7y ago
  Has the US' public capital dropped 10%? No. But prices are the discounted expectations of future profits, and future profits are suddenly less than we expect them to be. But it could be worse than that. How long did it take the economy to recover from the Black Death? At least 100 years. If too many people die, then yes, the public capital has actually been significantly damaged.
  - doingmyting 7y ago
    Yes if many people start dying it'll definitely be worst for sure. But that's a really big If since we haven't seen it here yet and 1. We're approaching warmer times and 2. Chinese deaths are slowing If we can somehow weather the spread of the disease (another big If), we'll be fine. But it's all speculation and fear at this point
  - asdfasgasdgasdg 7y ago
    Ok, so I guess it makes sense that the price would drop a lot since near term profits should be weighted more heavily than long term. 10% still seems like a lot with exponential discounting unless this is going to hit a lot harder and longer than I expect.
    - AnimalMuppet 7y ago
      Well... What I said is kind of the ideal world. The reasonable value of the stock is the time-discounted expectation of future profits. The actual value is heavily influenced by what each person thinks everyone else thinks. So for the price to drop, people don't have to think it will affect future profits at all. They just have to think that other people will think that the price should drop.
seanmcdirmid 7y ago
Not only that, but the Chinese economy had been teetering along on lots of debt spending. They have avoided a recession at all costs, and that doesn’t make for a very situation when the economy gets stressed, let alone with this huge shutdown. At the same time, the American economy keeps getting juiced by tax cuts, low interest rates, and lots of public deficit spending... Hopefully this is just a correction, because the alternative is scary and all too likely.
- crystaldev 7y ago
  The US economy has avoided recession at all costs also, the Trump administration shamelessly so, with the DJIA ATHs his signature accomplishment. It's crazy to think about but I felt much safer with even the Bush administration handling things in 2008, less pride involved. It's been ten years of kicking the can down the road, sort of obvious when the stock market flies but there's no change in the average person's life. The hangover's going to be really bad.
  - growlist 7y ago
    I've been in disbelief at stock prices for a long time - but where else can pension funds etc. go?
flukus 7y ago
You could say it's a correction to a risk they were previously ignoring, but even that feels generous.
bo1024 7y ago
I wonder though if coronavirus is additionally the excuse (or maybe "catalyst") for a correction that was going to happen sooner or later anyway. My mental model of the stock market recently is a bunch of people driving too fast on the highway during a snowstorm. As conditions steadily worsen they all know they're not in control, but nobody else is slowing down so they don't either. It just takes some warning sign -- like a truck that's slid off the road -- then they'll all acknowledge the speed is unsafe and slam on the brakes together. > Companies are already warning about significant impacts on quarterly earnings. Those are actual, real things — not people just realizing they got a little too excited. But it's not clear (to me) the stock market prices are tied at all to actual, real things. Maybe relative prices of different companies reflect who's doing well compared to whom, but overall the market is up when people expect other people to continue buying and down when they worry they won't (both self-fulfilling prophecies). Maybe the only reason the market dips before recessions is investors expect a decrease in the total amount being pumped into the market by average people's 401k's.
- crystaldev 7y ago
  You're forgetting that the stock of more than one company is traded.
  - bo1024 7y ago
    Can you explain how that impacts my mental model / questions? Are you pointing out that some companies may be barely affected by coronavirus and some a lot?
    - crystaldev 7y ago
      Yes, and also some companies may be affected more by their own fortunes, or the fortunes of their particular industry, than by the mood of a monolithic "market."
      - Scarblac 7y ago
        But it seems to be accepted wisdom nowadays that nobody can pick stocks and beat the average consistently. So what a large chunk of the market ends up doing is buying index trackers or achieving the same goal by spreading investments as widely as possible.
rp00 7y ago
You’re totally right in your second paragraph with regards to the catalyst, but I disagree there’s not also a bubble which makes this a lot worse.
arcticbull 7y ago
> One of the biggest manufacturing economies has essentially shut down. Had shut down. It's coming back online quickly. Starbucks has reopened 85% of their stores in China. [1] Delta Cargo says 80% of factories in the north and 60% of those in the south are back up and running. [2] The number of new cases is dropping in China [3]. [1] https://www.moneycontrol.com/news/business/companies/business-coming-back-in-china-says-delta-air-lines-cargo-unit-4975991.html https://www.moneycontrol.com/news/business/companies/busines... [2] https://www.businessinsider.com/starbucks-reopens-china-stores-citing-signs-of-coronavirus-recovery-2020-2 https://www.businessinsider.com/starbucks-reopens-china-stor... [3] https://www.wsj.com/articles/drop-in-new-coronavirus-cases-in-china-offers-hope-that-its-outbreak-is-ebbing-11582636045 https://www.wsj.com/articles/drop-in-new-coronavirus-cases-i...
- Bombthecat 7y ago
  Yeah but its just starting in europe. And Italy is hit pretty hard. They were doing quarantines. But since they realised that no one else will do it. They decided to stop doing quarantines either. I think we will see pretty bad impact in Europe. Maybe worse than China.
  - growlist 7y ago
    And now there's also a million Syrian refugees heading to southern Europe. What next?
  - whb07 7y ago
    What exactly is Italy's export capacity? What Italian goods do you interact with besides pasta, olive oil, wine, cheese, and the occasional Ferrari?
- trengorilla 7y ago
  Let's see how many people are going in those Starbucks outlets.
joubert 7y ago
MarketWatch posits 2 additional reasons (besides the COVID-19 disease outbreak): • 2020 election • lofty valuations (highest forward price-to-earnings ratio for the benchmark index since May 2002 https://www.marketwatch.com/story/the-dow-just-logged-its-worst-2-day-point-slide-in-history-here-are-5-reasons-the-stock-market-is-tanking-and-it-isnt-just-the-coronavirus-2020-02-25 https://www.marketwatch.com/story/the-dow-just-logged-its-wo...
- daxorid 7y ago
  > lofty valuations This is the correct answer. Enormous equity bubble over a decade in the making. There is precisely zero justification for buying index funds at a Shiller PE over 30, yet that's exactly what every price-insensitive investor on the planet, including the SNB, has been doing for years, now. Every bubble eventually finds a pin. Looks like we finally found one.
  - shoo 7y ago
    Assuming Schiller PE is another name for cyclically adjusted PE, i.e. mean over t in {the last 10 years until now} of PricePerShare(now)/EarningsPerShare(t) Some stocks for individual companies can have a Schiller PE of over 30, or worse, a negative Schiller PE because on average they've made a negative net profit over the last 10 years, and still be undervalued from a fundamental perspective based on net present value of estimated future net profits. E.g. young business with strong maintainable revenue growth in industry with high fixed costs that needs to increase revenue by another 15% before net earnings become positive for the first time. CAPE is a useful metric but it does not differentiate between a mature company in a downward long term trend versus a young company working toward profitability. Of course, I completely agree that some stocks with a CAPE of over 30 are overvalued, but that depends on what you believe the fundamental valuation of the particular company in question to be. I also completely agree that expected returns on invested equity should be relatively low compared to historical returns when buying into an index that is highly priced from a CAPE perspective. Interest rates are low, there's a lot of cash looking for a good investment relative to the number of good investments. Expected returns for investments in equity have been relatively low, compared to historical returns, but what else are you going to do with money to invest right now? Invest it in bonds? Keep it in cash and wait? If hypothetically the average investor gets irrationally spooked or rationally concerned about price momentum if of their investment time horizon is very short - and move to withdraw e.g. 10% of their stock investments - we should expect to see a large drop in stock market prices in the short term and a corresponding increase in expected yield of stocks as an asset class .

by orev 7y ago

deleted 7y ago

[deleted]

all_blue_chucks 7y ago

"Correction" refers to the idea that the market was previously overpriced by 10%. In this case one would say it was not pricing in the risk of the virus correctly, until now. If it falls 20% from the high, they stop calling it a correction and start calling it a bear market. Of course, the market went up thirty freaking percent last year to put this price action in perspective.

opportune 7y ago
Saying the market went up 30% last year is a little deceptive. There was a sharp correction in December right before the year started and it was down like 15-20% from the high in September
notduncansmith 7y ago
Yeah, my bet is that the virus is just helping the market get back to normal by getting people to start taking their values seriously. The market has been seriously inflated for a while. It is interesting, in light of the financial situation, how China and the US are handling the virus. Too attached to the status quo and trying to prevent a more serious correction by downplaying it? Or deliberately under-responding for other reasons?
- blaser-waffle 7y ago
  > Too attached to the status quo and trying to prevent a more serious correction by downplaying it? Or deliberately under-responding for other reasons? Conspiracy territory, but if I'm not in China I'm quietly hoping it gets crazy for another month or two, drives stock prices down further, and then buy at low rates. The constant "we don't know what's really going on!" doom and gloom articles make me think they're either pandering desperately for clickbate, or trying to drive the market further down (maybe both?).
  - notduncansmith 7y ago
    > Conspiracy territory True, I should assume incompetence before malice. Something about it just feels too calculated to me. I guess we’ll just have to wait and see shrug

asdfasgasdgasdg 7y ago

Something that's never totally clear to me, either on the upside or the downside: say the largest economy in the world is shut down. Even say it stays that way for three or four months. Does that actually mean that the US' public capital has dropped ten percent in value? It's my very strong suspicion that in two years we will be chugging along again as if this never happened. Why is 10% the right number to contract in that situation? (In case you can't guess, I'm still 100% long.)

AnimalMuppet 7y ago
Has the US' public capital dropped 10%? No. But prices are the discounted expectations of future profits, and future profits are suddenly less than we expect them to be. But it could be worse than that. How long did it take the economy to recover from the Black Death? At least 100 years. If too many people die, then yes, the public capital has actually been significantly damaged.
- doingmyting 7y ago
  Yes if many people start dying it'll definitely be worst for sure. But that's a really big If since we haven't seen it here yet and 1. We're approaching warmer times and 2. Chinese deaths are slowing If we can somehow weather the spread of the disease (another big If), we'll be fine. But it's all speculation and fear at this point
- asdfasgasdgasdg 7y ago
  Ok, so I guess it makes sense that the price would drop a lot since near term profits should be weighted more heavily than long term. 10% still seems like a lot with exponential discounting unless this is going to hit a lot harder and longer than I expect.
  - AnimalMuppet 7y ago
    Well... What I said is kind of the ideal world. The reasonable value of the stock is the time-discounted expectation of future profits. The actual value is heavily influenced by what each person thinks everyone else thinks. So for the price to drop, people don't have to think it will affect future profits at all. They just have to think that other people will think that the price should drop.

seanmcdirmid 7y ago

Not only that, but the Chinese economy had been teetering along on lots of debt spending. They have avoided a recession at all costs, and that doesn’t make for a very situation when the economy gets stressed, let alone with this huge shutdown. At the same time, the American economy keeps getting juiced by tax cuts, low interest rates, and lots of public deficit spending... Hopefully this is just a correction, because the alternative is scary and all too likely.

crystaldev 7y ago
The US economy has avoided recession at all costs also, the Trump administration shamelessly so, with the DJIA ATHs his signature accomplishment. It's crazy to think about but I felt much safer with even the Bush administration handling things in 2008, less pride involved. It's been ten years of kicking the can down the road, sort of obvious when the stock market flies but there's no change in the average person's life. The hangover's going to be really bad.
- growlist 7y ago
  I've been in disbelief at stock prices for a long time - but where else can pension funds etc. go?

flukus 7y ago

You could say it's a correction to a risk they were previously ignoring, but even that feels generous.

bo1024 7y ago

I wonder though if coronavirus is additionally the excuse (or maybe "catalyst") for a correction that was going to happen sooner or later anyway. My mental model of the stock market recently is a bunch of people driving too fast on the highway during a snowstorm. As conditions steadily worsen they all know they're not in control, but nobody else is slowing down so they don't either. It just takes some warning sign -- like a truck that's slid off the road -- then they'll all acknowledge the speed is unsafe and slam on the brakes together. > Companies are already warning about significant impacts on quarterly earnings. Those are actual, real things — not people just realizing they got a little too excited. But it's not clear (to me) the stock market prices are tied at all to actual, real things. Maybe relative prices of different companies reflect who's doing well compared to whom, but overall the market is up when people expect other people to continue buying and down when they worry they won't (both self-fulfilling prophecies). Maybe the only reason the market dips before recessions is investors expect a decrease in the total amount being pumped into the market by average people's 401k's.

crystaldev 7y ago
You're forgetting that the stock of more than one company is traded.
- bo1024 7y ago
  Can you explain how that impacts my mental model / questions? Are you pointing out that some companies may be barely affected by coronavirus and some a lot?
  - crystaldev 7y ago
    Yes, and also some companies may be affected more by their own fortunes, or the fortunes of their particular industry, than by the mood of a monolithic "market."
    - Scarblac 7y ago
      But it seems to be accepted wisdom nowadays that nobody can pick stocks and beat the average consistently. So what a large chunk of the market ends up doing is buying index trackers or achieving the same goal by spreading investments as widely as possible.

rp00 7y ago

You’re totally right in your second paragraph with regards to the catalyst, but I disagree there’s not also a bubble which makes this a lot worse.

arcticbull 7y ago

> One of the biggest manufacturing economies has essentially shut down. Had shut down. It's coming back online quickly. Starbucks has reopened 85% of their stores in China. [1] Delta Cargo says 80% of factories in the north and 60% of those in the south are back up and running. [2] The number of new cases is dropping in China [3]. [1] https://www.moneycontrol.com/news/business/companies/business-coming-back-in-china-says-delta-air-lines-cargo-unit-4975991.html https://www.moneycontrol.com/news/business/companies/busines... [2] https://www.businessinsider.com/starbucks-reopens-china-stores-citing-signs-of-coronavirus-recovery-2020-2 https://www.businessinsider.com/starbucks-reopens-china-stor... [3] https://www.wsj.com/articles/drop-in-new-coronavirus-cases-in-china-offers-hope-that-its-outbreak-is-ebbing-11582636045 https://www.wsj.com/articles/drop-in-new-coronavirus-cases-i...

Bombthecat 7y ago
Yeah but its just starting in europe. And Italy is hit pretty hard. They were doing quarantines. But since they realised that no one else will do it. They decided to stop doing quarantines either. I think we will see pretty bad impact in Europe. Maybe worse than China.
- growlist 7y ago
  And now there's also a million Syrian refugees heading to southern Europe. What next?
- whb07 7y ago
  What exactly is Italy's export capacity? What Italian goods do you interact with besides pasta, olive oil, wine, cheese, and the occasional Ferrari?
trengorilla 7y ago
Let's see how many people are going in those Starbucks outlets.

joubert 7y ago

MarketWatch posits 2 additional reasons (besides the COVID-19 disease outbreak): • 2020 election • lofty valuations (highest forward price-to-earnings ratio for the benchmark index since May 2002 https://www.marketwatch.com/story/the-dow-just-logged-its-worst-2-day-point-slide-in-history-here-are-5-reasons-the-stock-market-is-tanking-and-it-isnt-just-the-coronavirus-2020-02-25 https://www.marketwatch.com/story/the-dow-just-logged-its-wo...

daxorid 7y ago
> lofty valuations This is the correct answer. Enormous equity bubble over a decade in the making. There is precisely zero justification for buying index funds at a Shiller PE over 30, yet that's exactly what every price-insensitive investor on the planet, including the SNB, has been doing for years, now. Every bubble eventually finds a pin. Looks like we finally found one.
- shoo 7y ago
  Assuming Schiller PE is another name for cyclically adjusted PE, i.e. mean over t in {the last 10 years until now} of PricePerShare(now)/EarningsPerShare(t) Some stocks for individual companies can have a Schiller PE of over 30, or worse, a negative Schiller PE because on average they've made a negative net profit over the last 10 years, and still be undervalued from a fundamental perspective based on net present value of estimated future net profits. E.g. young business with strong maintainable revenue growth in industry with high fixed costs that needs to increase revenue by another 15% before net earnings become positive for the first time. CAPE is a useful metric but it does not differentiate between a mature company in a downward long term trend versus a young company working toward profitability. Of course, I completely agree that some stocks with a CAPE of over 30 are overvalued, but that depends on what you believe the fundamental valuation of the particular company in question to be. I also completely agree that expected returns on invested equity should be relatively low compared to historical returns when buying into an index that is highly priced from a CAPE perspective. Interest rates are low, there's a lot of cash looking for a good investment relative to the number of good investments. Expected returns for investments in equity have been relatively low, compared to historical returns, but what else are you going to do with money to invest right now? Invest it in bonds? Keep it in cash and wait? If hypothetically the average investor gets irrationally spooked or rationally concerned about price momentum if of their investment time horizon is very short - and move to withdraw e.g. 10% of their stock investments - we should expect to see a large drop in stock market prices in the short term and a corresponding increase in expected yield of stocks as an asset class .