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And yet market futures are green, just like they always are after horrible news. How high does unemployment have to get before investor sentiment shifts and th

And yet market futures are green, just like they always are after horrible news. How high does unemployment have to get before investor sentiment shifts and the market tanks? 20%? 50%? Was the market severely undervalued a few months ago, when we were previously at these levels? It’s hard to see how this pandemic is anything other than a huge drag on the economy over the next few years, at least.

vikramkr 6y ago
Looks like you posted as I was typing my comment responding to the inevitable "why are the markets up" comment haha. This news is better than the market expected. They had priced in an expected unemployment rate of 16%[0]. Traders dont wait for the bad news to make buy sell decisions, they traded off of what they believed the report would be and had forecasts made, sending stocks down on average. They were wrong, so the markets will adjust for whatever the new impacts are. Even if the actual unemployment rate was exactly the forecast, the markets will have gone up because the uncertainty in that part of the forecast will have gone away, and lower uncertainty means higher valuations, all else being equal. [0]https://www.wsj.com/articles/april-jobs-report-likely-to-show-highest-unemployment-rate-on-record-11588514401 https://www.wsj.com/articles/april-jobs-report-likely-to-sho...
- ryanwaggoner 6y ago
  That only makes sense for an explanation of why the market is up today, not why it's hanging around the levels it was in the fall of 2019. Not everything is priced in. Given the collapse of consumer demand, the depression-era surge in unemployment, the loss of GDP, and the dim prospects of a rapid recovery in 2020, the market was either severely undervalued in 2019 or is severely overvalued right now. Or both.
  - deleted 6y ago
    [deleted]
  - vorpalhex 6y ago
    > Given the collapse of consumer demand Consumer demand has generally shifted, online commerce is seeing a boom. It's reasonable to theorize there will be a brick and mortar consumer boom once things normalize. > the depression-era surge in unemployment Unemployment includes the losses the market has already accounted for, temporary unemployment and reduced hours that will go back towards normal, and the initial numbers aren't as bad as theorized (but those numbers are suspect). > the loss of GDP Yeah but everyone else is losing GDP too generally. > the dim prospects of a rapid recovery in 2020 Maybe. I've been very pleasantly surprised at how effective we've flattened the curve and the overall trajectory figures are much better than initial estimates pegged them at. Many places outside of the eastcoast have done massively better than predicted, and even NYC is doing a good job of staying within hospital capacity. Remember when this first happened we had no data, and the market corrected assuming the absolute worse. Now we're finding out that things are not as bad as the initial models showed they would be - and the initial models suggested crazy numbers - so while the current situation isn't all roses, it's generally better than anyone honestly predicted.
    - matwood 6y ago
      > Remember when this first happened we had no data Every time news come out and people wonder why the market is up, this is what they miss (and I've explain in more detail in other threads). Risk is priceable, uncertainty is not. Bad data (not wrong data) is better than no data. When people say 'it's priced in' what they typically mean is that uncertainty often pushes the market lower than bad things that are knowns. And, it makes sense. Individuals are almost always more stressed over an unknown than known bad news. It's human nature.
  - vikramkr 6y ago
    Don't forget the unprecedented level of government stimulus, the enormous bailout, and incredibly low interest rates. That's a few trillion bucks pumped in, plus the government has shown its willingness to limit downside risk with absurd levels of bailouts
    - frockington1 6y ago
      It's also the government that forced the economy to shut down. I think it's fair that if they are going to force close the economy they shoulder the burden
  - JoshuaDavid 6y ago
    My pet hypothesis is that the market is pricing in a large amount of expected near-term inflation. In other words, it's not that the market thinks that companies are not going to lose much value due to the COVID-19 pandemic, it's that the market expects that the dollar will lose almost as much value as the average company. Share price is an exchange rate between dollars and fractions of ownership of a company - it goes up when the value of the company goes up, and also goes up when the value of the dollar goes down. Of course take this hypothesis with a large grain of salt - I'm pretty sure there exist ways to figure out expected inflation, but I'm not sure what they are. Specifically, if I knew of something like a Consumer Price Index futures market, that would fairly definitively answer my question of whether expected inflation is a large part of why the stock market is priced so high relative to the dollar. Absent something like that, I have no strong evidence for or against my pet hypothesis (if you know of something like that, please do let me know).
    - nkurz 6y ago
      I think your hypothesis explains part but not all of the situation. Complicating things, inflation is surprisingly hard to measure. One of the main components of CPI is rent (or rent equivalent for homeowners). It seems unlikely that rents are going to skyrocket anytime soon, which means that by the official measure, in the short term deflation might actually be more likely than inflation. If you are looking for "futures" on CPI, you should probably look at the pricing for TIPS (Treasury Inflation Protected Securities). There was a new issuing of a 5-year TIPS a couple weeks ago, and the pricing was about the lowest ever. Which is to say that the market expects very low inflation as measured by CPI-U: https://tipswatch.com/2020/04/23/real-yield-on-new-5-year-tips-dips-deeply-negative-at-0-32/ https://tipswatch.com/2020/04/23/real-yield-on-new-5-year-ti....
      - JoshuaDavid 6y ago
        The pricing for TIPS looks like exactly what I was looking for, thanks! So that is pretty strong evidence against my pet hypothesis that the market expects that a dollar in the future will buy less value. While I suppose it is _possible_ that the expectation is that the cost of things not included in the CPI's basket of goods will increase much faster than the cost of things included in the CPI's basket of goods, that seems like quite a stretch, and I see no particular reason COVID would make that more the case now than it was 3 months ago. At this point I am very confused about current market valuations. The market is only down around 10% from its peak valuation, implying that people smarter than I am think that the combined effects of the shutdown of large parts of the economy for an indefinite period plus whatever downstream effects the resulting bankruptcies / disruption have only reduce the collective net present value of publicly traded companies by around 10%. As a layperson I wouldn't be surprised to see fully 10% of publicly traded companies by market cap go bankrupt, which I expect would eliminate that 10% of NPV right then and there. But right now if you think there's a better than 50% chance of a 10% drop in the S&P 500 before the end of the year, you can make a killing on stock options (sell puts at ~330 to ~340). So clearly people are putting their money where their mouth is when it comes to betting that COVID won't have further massive impacts, so I must be missing something. I'm really wondering what I'm missing though. Maybe 10% of companies by market cap going bankrupt is actually really implausible, or maybe there's an expectation that existing publicly traded companies will expand to fill in the niches left by the companies that die off. It's kind of maddening not understanding what's going on though.
Axsuul 6y ago
Markets think into the future, not the present
- aguyfromnb 6y ago
  >Markets think into the future, not the present How far into the future, then? Over a long enough time span everything goes to zero. Are there no future consequences to record levels of unemployment? Everyone just goes back to work in the fall like nothing happened?
  - Axsuul 6y ago
    It’s anyone’s guess but the market being green means investors are optimistic about the future. Everyone going back to work is not an unrealistic scenario since there are countries in Asia that are already doing this. Also keep in mind unemployment rates are expected during a pandemic. They are apples to oranges when comparing them to high employment rates during times of normalcy. Finally I think it’s very easy for humans to overestimate current situations and underestimate just how easy it is for society to forget what it was like half a year ago.
    - aguyfromnb 6y ago
      >Everyone going back to work is not an unrealistic scenario since there are countries in Asia that are already doing this. You're not following the economic story very closely if you think any of those countries are "back to normal". >Also keep in mind unemployment rates are expected during a pandemic. Do you have a source to anything at all about how any of this was "expected"?
      - Axsuul 6y ago
        I never said those countries are "back to normal", you're misquoting me. I meant to say they are going back to work. Further compound that by countries like Sweden that are business as usual You don't need a source. You already know it will lead to higher unemployment since pandemic -> everyone staying home -> businesses halted -> people losing their jobs (although the market has judged this as ephemeral)
david-gpu 6y ago
I think it's a combination of three factors. First, central banks are propping up the markets and have stated they will do whatever it takes. That gives investors confidence that they wont face excessive risk. Second, unemployment is not yet affecting that much the sort of people who invest in stocks, upper-middle class white collar workers. Third, investors are still optimistic that this will be a temporary setback and things will return to normal fairly quickly.
code4tee 6y ago
The markets already know the figures are terrible and that’s priced in already. Unless the numbers come out worse than what the market was expecting there’s no reason for the market to go down on announcement. Often the market will go up on bad news because the market had been expecting the news to be even worse. This sometimes happens when companies have a bad quarter that was less terrible than people had feared and the stock goes up quite a bit.
- aguyfromnb 6y ago
  >The markets already know the figures are terrible and that’s priced in already. I'm amazed that there are still people out there that believe the stock market is composed of a ton of rational actors calculating the net present value of future cash flows from these busiensses, and buying and selling shares accordingly. I'm sure that's how Shopify has valuation metrics far higher than Amazon did during the peak of the Dotcom bubble, or how Uber loses $3B on $3.5B in revenue, while admitting their "growth product" sucks, and it goes up 10%+, or how companies like Virgin Galactic can lose $60MM on $250k in revenue! If you ask me, stocks are going up because the entire global finance system faces tremendous uncertainty, with every country printing money as fast as they can, trying no to collapse into depression. There is literally no alternative to US stocks.
  - vernie 6y ago
    Thank you Based God [0] [0] https://twitter.com/lilbthebasedgod/status/1239603502306881536 https://twitter.com/lilbthebasedgod/status/12396035023068815...
waylandsmithers 6y ago
I think it makes sense that significant numbers of stockholders right now would rather Hold than Sell. Unless you really need the cash from liquidating right now, there is a good argument for riding this out and avoiding selling low.
disease 6y ago
I wonder what the chances are that the treasury and/or fed are buying equities en masse behind the scenes. It seems like a politically savvy move: come November, just point out that the stock market is going through the roof during a pandemic and guarantee your re-election.
jcfrei 6y ago
Current prices reflect the ongoing monetization of gov and corporate debt. If the Fed today announced they will refrain from any further QE then markets would really fall.

vikramkr 6y ago

Looks like you posted as I was typing my comment responding to the inevitable "why are the markets up" comment haha. This news is better than the market expected. They had priced in an expected unemployment rate of 16%[0]. Traders dont wait for the bad news to make buy sell decisions, they traded off of what they believed the report would be and had forecasts made, sending stocks down on average. They were wrong, so the markets will adjust for whatever the new impacts are. Even if the actual unemployment rate was exactly the forecast, the markets will have gone up because the uncertainty in that part of the forecast will have gone away, and lower uncertainty means higher valuations, all else being equal. [0]https://www.wsj.com/articles/april-jobs-report-likely-to-show-highest-unemployment-rate-on-record-11588514401 https://www.wsj.com/articles/april-jobs-report-likely-to-sho...

ryanwaggoner 6y ago
That only makes sense for an explanation of why the market is up today, not why it's hanging around the levels it was in the fall of 2019. Not everything is priced in. Given the collapse of consumer demand, the depression-era surge in unemployment, the loss of GDP, and the dim prospects of a rapid recovery in 2020, the market was either severely undervalued in 2019 or is severely overvalued right now. Or both.
- deleted 6y ago
  [deleted]
- vorpalhex 6y ago
  > Given the collapse of consumer demand Consumer demand has generally shifted, online commerce is seeing a boom. It's reasonable to theorize there will be a brick and mortar consumer boom once things normalize. > the depression-era surge in unemployment Unemployment includes the losses the market has already accounted for, temporary unemployment and reduced hours that will go back towards normal, and the initial numbers aren't as bad as theorized (but those numbers are suspect). > the loss of GDP Yeah but everyone else is losing GDP too generally. > the dim prospects of a rapid recovery in 2020 Maybe. I've been very pleasantly surprised at how effective we've flattened the curve and the overall trajectory figures are much better than initial estimates pegged them at. Many places outside of the eastcoast have done massively better than predicted, and even NYC is doing a good job of staying within hospital capacity. Remember when this first happened we had no data, and the market corrected assuming the absolute worse. Now we're finding out that things are not as bad as the initial models showed they would be - and the initial models suggested crazy numbers - so while the current situation isn't all roses, it's generally better than anyone honestly predicted.
  - matwood 6y ago
    > Remember when this first happened we had no data Every time news come out and people wonder why the market is up, this is what they miss (and I've explain in more detail in other threads). Risk is priceable, uncertainty is not. Bad data (not wrong data) is better than no data. When people say 'it's priced in' what they typically mean is that uncertainty often pushes the market lower than bad things that are knowns. And, it makes sense. Individuals are almost always more stressed over an unknown than known bad news. It's human nature.
- vikramkr 6y ago
  Don't forget the unprecedented level of government stimulus, the enormous bailout, and incredibly low interest rates. That's a few trillion bucks pumped in, plus the government has shown its willingness to limit downside risk with absurd levels of bailouts
  - frockington1 6y ago
    It's also the government that forced the economy to shut down. I think it's fair that if they are going to force close the economy they shoulder the burden
- JoshuaDavid 6y ago
  My pet hypothesis is that the market is pricing in a large amount of expected near-term inflation. In other words, it's not that the market thinks that companies are not going to lose much value due to the COVID-19 pandemic, it's that the market expects that the dollar will lose almost as much value as the average company. Share price is an exchange rate between dollars and fractions of ownership of a company - it goes up when the value of the company goes up, and also goes up when the value of the dollar goes down. Of course take this hypothesis with a large grain of salt - I'm pretty sure there exist ways to figure out expected inflation, but I'm not sure what they are. Specifically, if I knew of something like a Consumer Price Index futures market, that would fairly definitively answer my question of whether expected inflation is a large part of why the stock market is priced so high relative to the dollar. Absent something like that, I have no strong evidence for or against my pet hypothesis (if you know of something like that, please do let me know).
  - nkurz 6y ago
    I think your hypothesis explains part but not all of the situation. Complicating things, inflation is surprisingly hard to measure. One of the main components of CPI is rent (or rent equivalent for homeowners). It seems unlikely that rents are going to skyrocket anytime soon, which means that by the official measure, in the short term deflation might actually be more likely than inflation. If you are looking for "futures" on CPI, you should probably look at the pricing for TIPS (Treasury Inflation Protected Securities). There was a new issuing of a 5-year TIPS a couple weeks ago, and the pricing was about the lowest ever. Which is to say that the market expects very low inflation as measured by CPI-U: https://tipswatch.com/2020/04/23/real-yield-on-new-5-year-tips-dips-deeply-negative-at-0-32/ https://tipswatch.com/2020/04/23/real-yield-on-new-5-year-ti....
    - JoshuaDavid 6y ago
      The pricing for TIPS looks like exactly what I was looking for, thanks! So that is pretty strong evidence against my pet hypothesis that the market expects that a dollar in the future will buy less value. While I suppose it is _possible_ that the expectation is that the cost of things not included in the CPI's basket of goods will increase much faster than the cost of things included in the CPI's basket of goods, that seems like quite a stretch, and I see no particular reason COVID would make that more the case now than it was 3 months ago. At this point I am very confused about current market valuations. The market is only down around 10% from its peak valuation, implying that people smarter than I am think that the combined effects of the shutdown of large parts of the economy for an indefinite period plus whatever downstream effects the resulting bankruptcies / disruption have only reduce the collective net present value of publicly traded companies by around 10%. As a layperson I wouldn't be surprised to see fully 10% of publicly traded companies by market cap go bankrupt, which I expect would eliminate that 10% of NPV right then and there. But right now if you think there's a better than 50% chance of a 10% drop in the S&P 500 before the end of the year, you can make a killing on stock options (sell puts at ~330 to ~340). So clearly people are putting their money where their mouth is when it comes to betting that COVID won't have further massive impacts, so I must be missing something. I'm really wondering what I'm missing though. Maybe 10% of companies by market cap going bankrupt is actually really implausible, or maybe there's an expectation that existing publicly traded companies will expand to fill in the niches left by the companies that die off. It's kind of maddening not understanding what's going on though.

Axsuul 6y ago

Markets think into the future, not the present

aguyfromnb 6y ago
>Markets think into the future, not the present How far into the future, then? Over a long enough time span everything goes to zero. Are there no future consequences to record levels of unemployment? Everyone just goes back to work in the fall like nothing happened?
- Axsuul 6y ago
  It’s anyone’s guess but the market being green means investors are optimistic about the future. Everyone going back to work is not an unrealistic scenario since there are countries in Asia that are already doing this. Also keep in mind unemployment rates are expected during a pandemic. They are apples to oranges when comparing them to high employment rates during times of normalcy. Finally I think it’s very easy for humans to overestimate current situations and underestimate just how easy it is for society to forget what it was like half a year ago.
  - aguyfromnb 6y ago
    >Everyone going back to work is not an unrealistic scenario since there are countries in Asia that are already doing this. You're not following the economic story very closely if you think any of those countries are "back to normal". >Also keep in mind unemployment rates are expected during a pandemic. Do you have a source to anything at all about how any of this was "expected"?
    - Axsuul 6y ago
      I never said those countries are "back to normal", you're misquoting me. I meant to say they are going back to work. Further compound that by countries like Sweden that are business as usual You don't need a source. You already know it will lead to higher unemployment since pandemic -> everyone staying home -> businesses halted -> people losing their jobs (although the market has judged this as ephemeral)

david-gpu 6y ago

I think it's a combination of three factors. First, central banks are propping up the markets and have stated they will do whatever it takes. That gives investors confidence that they wont face excessive risk. Second, unemployment is not yet affecting that much the sort of people who invest in stocks, upper-middle class white collar workers. Third, investors are still optimistic that this will be a temporary setback and things will return to normal fairly quickly.

code4tee 6y ago

The markets already know the figures are terrible and that’s priced in already. Unless the numbers come out worse than what the market was expecting there’s no reason for the market to go down on announcement. Often the market will go up on bad news because the market had been expecting the news to be even worse. This sometimes happens when companies have a bad quarter that was less terrible than people had feared and the stock goes up quite a bit.

aguyfromnb 6y ago
>The markets already know the figures are terrible and that’s priced in already. I'm amazed that there are still people out there that believe the stock market is composed of a ton of rational actors calculating the net present value of future cash flows from these busiensses, and buying and selling shares accordingly. I'm sure that's how Shopify has valuation metrics far higher than Amazon did during the peak of the Dotcom bubble, or how Uber loses $3B on $3.5B in revenue, while admitting their "growth product" sucks, and it goes up 10%+, or how companies like Virgin Galactic can lose $60MM on $250k in revenue! If you ask me, stocks are going up because the entire global finance system faces tremendous uncertainty, with every country printing money as fast as they can, trying no to collapse into depression. There is literally no alternative to US stocks.
- vernie 6y ago
  Thank you Based God [0] [0] https://twitter.com/lilbthebasedgod/status/1239603502306881536 https://twitter.com/lilbthebasedgod/status/12396035023068815...

waylandsmithers 6y ago

I think it makes sense that significant numbers of stockholders right now would rather Hold than Sell. Unless you really need the cash from liquidating right now, there is a good argument for riding this out and avoiding selling low.

disease 6y ago

I wonder what the chances are that the treasury and/or fed are buying equities en masse behind the scenes. It seems like a politically savvy move: come November, just point out that the stock market is going through the roof during a pandemic and guarantee your re-election.

jcfrei 6y ago

Current prices reflect the ongoing monetization of gov and corporate debt. If the Fed today announced they will refrain from any further QE then markets would really fall.