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Even if there is a second wave, there will be a time after Corona eventually. There won't be any new players by then so the market shares will almost be unchang

Even if there is a second wave, there will be a time after Corona eventually. There won't be any new players by then so the market shares will almost be unchanged. Stock prices are discounted future profits for about 15 to 20 years. Those profits are still there when Corona is over. From that perspective, why should share prices fall by more than 5-10% for every year that Corona is locking down the economy? *edit: If anything, the economy will prosper because Corona has forced every company into the 21th century by requiring remote work and digital workflows.

ericb 6y ago
> why should share prices fall by more than 5-10% for every year that Corona is locking down the economy? Risk adjustment. 1-Risk of death/bankruptcy for companies. 2-Risk of reduced consumer spending. This can happen because people are in financial shock, or because unemployment stays high. Perhaps some of these layoffs aren't "furloughs." Some of these businesses won't survive, like many restaurants. My expense is your revenue, but I won't spend if I don't feel "safe" physically and financially and if I don't have a job, well... On top of which, what if some part of society stops going out? 3-Risk of permanently slowed economic activity due to coronavirus spread in trading partners. 4-Risk that the vaccines don't work out and there is no "time after corona." Even if this risk is small, it is non-zero, and catastrophic.
joering2 6y ago
Because someone has to buy products and services? With 40 mil unemployment numbers it will be hard to sell stuff when noone has power to buy. Take my mother in law as example. Hard core shopoholic. Amazon and QVC packages coming in daily. Hair nails etc done weekly at salons. Now for two weeks silence. She lost her job and empty bank account hit her like reality check. Shes on her way to a friend - they will do each other hair and nails. And when I told her it will all go back to normal on January 1st, so many people died she tells me “i am not going out anyways for very long time”
Dumblydorr 6y ago
How do you know there will be a time after Corona? In all likelihood, it is here to stay like influenza and rhinovirus and other respiratory illnesses. The only way we recover the economy is by gaining herd immunity such that 25-50k yearly die, not 200k. That comes with vaccine and with wide scale exposure, which I'd wager is by 2021 summer. But even then, old folks will still die by the thousands each year due to covid 19.
- notabee 6y ago
  At the current death rate, we're on track to reach 200k dead by early July. And that's only the deaths that are being counted. There is a substantial increase in overall mortality beyond the year to year average, beyond the confirmed Covid deaths. Considering that this disease is causing pulmonary embolisms, strokes, heart attacks, and other manifestations of out of control clotting even in healthy young people, we may realistically have already hit 200k dead in June counting the people who have died suddenly at home without being tested.
  - steveeq1 6y ago
    There are considerable financial incentives to "fudge the numbers" regarding corona. It's to the point where if someone has a stroke, and he has corona, it will be counted as a "corona death".
    - dmode 6y ago
      This is the theory that has been peddled quite a bit. But doesn’t really add up, since you can easily do a year over year comparison of death numbers. Unless, you suddenly think a significant portion of people are dying of heart attack this year
    - gvjddbnvdrbv 6y ago
      It is highly likely that if someone with corona has a stroke it is caused by the corona. Coronavirus causes clotting.
    - majewsky 6y ago
deleted 6y ago
[deleted]
nostrademons 6y ago
From that perspective, the stock market should have no volatility in share prices whatsoever - it should fairly value each company based on their profits over the next 15 to 20 years, and since those profits don't change, neither should the share price. Stocks are based on expectations of future profits, i.e. psychology. "In the long run, the stock market is a weighing machine. In the short run, it's a voting machine." Few investors' psychology will let them look at a year of bad news and still think "Oh, it's going to get better in the future." After about 3 months you start doubting yourself and wondering if maybe you were wrong in the first place, and you've entered a brave new world where people randomly die and commerce or long-term plans are impossible. All of the economic data - corporate earnings, employment, share prices, etc. - will reflect the new normal, so there's no reason (other than your memory of what the '10s were like) to believe that share prices would always go up.
- shoo 6y ago
  > stock market should have no volatility in share prices whatsoever - it should fairly value each company based on their profits over the next 15 to 20 years Computing this depends on estimating/forecasting/extrapolating/guessing a lot of values. E.g. what kind of revenue growth the company will have. How the structure of company expenses may change. Parameters like a discount rate make a huge difference in the estimated value. In many cases the majority of the value for a discounted cash flow valuation of a stock comes from the tail term where you give up trying to unroll the contribution for each year and make a simpler approximation of what the company will be doing 20 years+ in the future. The computed share value has a lot of sensitivity to adjusting some of these inputs, and in many cases it is not at all obvious what values parameters should be set to.
  - nostrademons 6y ago
    But that's the point. Parent poster is assuming that the future profits of a company won't change over the next 15-20 years because of coronavirus. Everyone in this subthread is pointing out that that's not a valid assumption. We've already seen the discount rate drop to zero in the last couple months. Will it stay there? Will we get hyperinflation? Will we get deflation as laid-off workers lose their spending power? Will the target market of many companies end up dead? Will companies go bankrupt through lack of cash flow? Are we going to see civil unrest or a breakdown of political authority? Many of these are permanent consequences that will absolutely effect earnings 15-20 years in the future. The market seems to be pricing in an assumption that this will be a blip: we'll reopen, businesses will rehire, and 2021 will look much like 2019. I don't believe that's likely.
grey-area 6y ago
Stock prices are discounted future profits for about 15 to 20 years. Those profits are still there when Corona is over. From that perspective, why should share prices fall by more than 5-10% for every year that Corona is locking down the economy? Thats the theory. In practice stock prices wildly oscillate around expected value (which is a gradual curve up and to the right), with no apparent logic. As shiller points out in irrational exuberance, stock markets do not consistently reflect expected long term returns.
- koheripbal 6y ago
  No one makes the claim that short term price changes are rational. They are bets made by humans - very flawed biased humans. ... but if you can be more rational than them, then you can make a lot of money in the long term. ... but I find that most people who complain about irrational markets lack the conviction to bet against it.
dasudasu 6y ago
Discounting is also a harsh mistress. If your model expected a 10% discount rate but actually achieves -20%, say next year, then it would need to produce 51% just to get back to baseline on the year after that. Early missed returns do hurt disproportionately unless there is an easy way to get back on track.
xcasperx 6y ago
This is assuming a (or near) 100% efficient market. Which it definitely is not. Analysts use different methods to discount cash flows: https://www.investopedia.com/articles/professionals/072915/dcf-vs-comparables-which-one-use.asp https://www.investopedia.com/articles/professionals/072915/d... Finding R (what to discount by) can be difficult to do: https://www.investopedia.com/articles/investing/021015/advantages-and-disadvantages-capm-model.asp https://www.investopedia.com/articles/investing/021015/advan... I don't work in IB or PE so take what I put with a grain of salt, just what I've learned. Also, you know markets aren't near efficient when people invest in $ZOOM and not $ZM and when Elon tweets $TSLA stock is too high. You can look at daily gainers and losers and watch them over the course of the week. They are extremely volatile. If you're talking about the S&P500 it's a little easier to do. A little over 50% of the value of S&P 500 is the top 50 companies by weight. The top 100 equate to 70% and the top 250 equate to 90%.
- tfehring 6y ago
  There's a pretty good technical illustration of how the discount rate impacts stock prices here [0]. This does provide one plausible answer to the headline question from TFA: Corporations' expected future profits are lower than they were pre-COVID, but the valuation discount rate is lower because the expected future return for assets in general is lower, so the present value of corporations' expected future profits is the same-ish as it was pre-COVID. [0] https://johnhcochrane.blogspot.com/2018/02/stock-gyrations.html https://johnhcochrane.blogspot.com/2018/02/stock-gyrations.h...

ericb 6y ago

> why should share prices fall by more than 5-10% for every year that Corona is locking down the economy? Risk adjustment. 1-Risk of death/bankruptcy for companies. 2-Risk of reduced consumer spending. This can happen because people are in financial shock, or because unemployment stays high. Perhaps some of these layoffs aren't "furloughs." Some of these businesses won't survive, like many restaurants. My expense is your revenue, but I won't spend if I don't feel "safe" physically and financially and if I don't have a job, well... On top of which, what if some part of society stops going out? 3-Risk of permanently slowed economic activity due to coronavirus spread in trading partners. 4-Risk that the vaccines don't work out and there is no "time after corona." Even if this risk is small, it is non-zero, and catastrophic.

joering2 6y ago

Because someone has to buy products and services? With 40 mil unemployment numbers it will be hard to sell stuff when noone has power to buy. Take my mother in law as example. Hard core shopoholic. Amazon and QVC packages coming in daily. Hair nails etc done weekly at salons. Now for two weeks silence. She lost her job and empty bank account hit her like reality check. Shes on her way to a friend - they will do each other hair and nails. And when I told her it will all go back to normal on January 1st, so many people died she tells me “i am not going out anyways for very long time”

Dumblydorr 6y ago

How do you know there will be a time after Corona? In all likelihood, it is here to stay like influenza and rhinovirus and other respiratory illnesses. The only way we recover the economy is by gaining herd immunity such that 25-50k yearly die, not 200k. That comes with vaccine and with wide scale exposure, which I'd wager is by 2021 summer. But even then, old folks will still die by the thousands each year due to covid 19.

notabee 6y ago
At the current death rate, we're on track to reach 200k dead by early July. And that's only the deaths that are being counted. There is a substantial increase in overall mortality beyond the year to year average, beyond the confirmed Covid deaths. Considering that this disease is causing pulmonary embolisms, strokes, heart attacks, and other manifestations of out of control clotting even in healthy young people, we may realistically have already hit 200k dead in June counting the people who have died suddenly at home without being tested.
- steveeq1 6y ago
  There are considerable financial incentives to "fudge the numbers" regarding corona. It's to the point where if someone has a stroke, and he has corona, it will be counted as a "corona death".
  - dmode 6y ago
    This is the theory that has been peddled quite a bit. But doesn’t really add up, since you can easily do a year over year comparison of death numbers. Unless, you suddenly think a significant portion of people are dying of heart attack this year
  - gvjddbnvdrbv 6y ago
    It is highly likely that if someone with corona has a stroke it is caused by the corona. Coronavirus causes clotting.
  - majewsky 6y ago

deleted 6y ago

[deleted]

nostrademons 6y ago

From that perspective, the stock market should have no volatility in share prices whatsoever - it should fairly value each company based on their profits over the next 15 to 20 years, and since those profits don't change, neither should the share price. Stocks are based on expectations of future profits, i.e. psychology. "In the long run, the stock market is a weighing machine. In the short run, it's a voting machine." Few investors' psychology will let them look at a year of bad news and still think "Oh, it's going to get better in the future." After about 3 months you start doubting yourself and wondering if maybe you were wrong in the first place, and you've entered a brave new world where people randomly die and commerce or long-term plans are impossible. All of the economic data - corporate earnings, employment, share prices, etc. - will reflect the new normal, so there's no reason (other than your memory of what the '10s were like) to believe that share prices would always go up.

shoo 6y ago
> stock market should have no volatility in share prices whatsoever - it should fairly value each company based on their profits over the next 15 to 20 years Computing this depends on estimating/forecasting/extrapolating/guessing a lot of values. E.g. what kind of revenue growth the company will have. How the structure of company expenses may change. Parameters like a discount rate make a huge difference in the estimated value. In many cases the majority of the value for a discounted cash flow valuation of a stock comes from the tail term where you give up trying to unroll the contribution for each year and make a simpler approximation of what the company will be doing 20 years+ in the future. The computed share value has a lot of sensitivity to adjusting some of these inputs, and in many cases it is not at all obvious what values parameters should be set to.
- nostrademons 6y ago
  But that's the point. Parent poster is assuming that the future profits of a company won't change over the next 15-20 years because of coronavirus. Everyone in this subthread is pointing out that that's not a valid assumption. We've already seen the discount rate drop to zero in the last couple months. Will it stay there? Will we get hyperinflation? Will we get deflation as laid-off workers lose their spending power? Will the target market of many companies end up dead? Will companies go bankrupt through lack of cash flow? Are we going to see civil unrest or a breakdown of political authority? Many of these are permanent consequences that will absolutely effect earnings 15-20 years in the future. The market seems to be pricing in an assumption that this will be a blip: we'll reopen, businesses will rehire, and 2021 will look much like 2019. I don't believe that's likely.

grey-area 6y ago

Stock prices are discounted future profits for about 15 to 20 years. Those profits are still there when Corona is over. From that perspective, why should share prices fall by more than 5-10% for every year that Corona is locking down the economy? Thats the theory. In practice stock prices wildly oscillate around expected value (which is a gradual curve up and to the right), with no apparent logic. As shiller points out in irrational exuberance, stock markets do not consistently reflect expected long term returns.

koheripbal 6y ago
No one makes the claim that short term price changes are rational. They are bets made by humans - very flawed biased humans. ... but if you can be more rational than them, then you can make a lot of money in the long term. ... but I find that most people who complain about irrational markets lack the conviction to bet against it.

dasudasu 6y ago

Discounting is also a harsh mistress. If your model expected a 10% discount rate but actually achieves -20%, say next year, then it would need to produce 51% just to get back to baseline on the year after that. Early missed returns do hurt disproportionately unless there is an easy way to get back on track.

xcasperx 6y ago

This is assuming a (or near) 100% efficient market. Which it definitely is not. Analysts use different methods to discount cash flows: https://www.investopedia.com/articles/professionals/072915/dcf-vs-comparables-which-one-use.asp https://www.investopedia.com/articles/professionals/072915/d... Finding R (what to discount by) can be difficult to do: https://www.investopedia.com/articles/investing/021015/advantages-and-disadvantages-capm-model.asp https://www.investopedia.com/articles/investing/021015/advan... I don't work in IB or PE so take what I put with a grain of salt, just what I've learned. Also, you know markets aren't near efficient when people invest in $ZOOM and not $ZM and when Elon tweets $TSLA stock is too high. You can look at daily gainers and losers and watch them over the course of the week. They are extremely volatile. If you're talking about the S&P500 it's a little easier to do. A little over 50% of the value of S&P 500 is the top 50 companies by weight. The top 100 equate to 70% and the top 250 equate to 90%.

tfehring 6y ago
There's a pretty good technical illustration of how the discount rate impacts stock prices here [0]. This does provide one plausible answer to the headline question from TFA: Corporations' expected future profits are lower than they were pre-COVID, but the valuation discount rate is lower because the expected future return for assets in general is lower, so the present value of corporations' expected future profits is the same-ish as it was pre-COVID. [0] https://johnhcochrane.blogspot.com/2018/02/stock-gyrations.html https://johnhcochrane.blogspot.com/2018/02/stock-gyrations.h...