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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 pri

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.

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.