3 ms·

Doesn't this argument mean that the stock market should in theory be recession proof? If stocks are looking forward several decades, then it should be factoring

Doesn't this argument mean that the stock market should in theory be recession proof? If stocks are looking forward several decades, then it should be factoring in the recovery from any recession we face. Which as we've seen during various recessions doesn't seem to hold true.

peacefulhat 7y ago
Once investors become truly forward-thinking, snp will hit $30 quintillion 8^)
kube-system 7y ago
No, because traders don’t price the market as a whole, they price individual stocks. Some stocks will never recover, and some of that recovery will be companies that don’t exist yet. While these things might offset to create a market recovery, there’s no way to price in the expected cash flow for a company that doesn’t exist.
- matthewdgreen 7y ago
  Traders can certainly spread their bets across many companies representing a business sector, and routinely do so. This "a few firms might go bankrupt so this explains why entire sectors experience massive volatility that isn't justified by long-term revenue expectations" claim seems like someone trying to rationalize irrational human behavior.
  - javagram 7y ago
    Ok, but take the airline sector for example. Maybe one or more of the airlines will go bankrupt. Maybe they all somehow survive. The price of Delta, United, American etc. gets discounted because the risk of each individual stock being bankrupted is high. But they don’t go to 0, because there’s also a chance each of the airlines might somehow survive to next year and go back to profitability. If all the airlines go bankrupt, someone will step in and create new companies in the sector by buying up the bankrupt companies’ physical assets, but the existing shareholders will lose everything despite the sector itself being viable in the long term.
    - matthewdgreen 7y ago
      It’s much more likely that the other incumbent airline businesses just soak up that business, or the loss of competition sees price hikes across the board. Airlines are hard to spin up. TL;DR if the sector as a whole is healthy, and you’re willing to balance an investment portfolio across the whole sector, then your exposure to future revenues should be fairly healthy even if one company goes bankrupt. But you’re absolutely right that prices don’t behave as though this is the case.
mrep 7y ago
A company isn't guaranteed to make it out though and if they don't, your stock is now worth zero.
jbay808 7y ago
It should also be factoring the expected future recessions in, so when one comes along, the stock price should barely move! But I don't think that market participants are nearly good enough at prediction for that to happen.

peacefulhat 7y ago

Once investors become truly forward-thinking, snp will hit $30 quintillion 8^)

kube-system 7y ago

No, because traders don’t price the market as a whole, they price individual stocks. Some stocks will never recover, and some of that recovery will be companies that don’t exist yet. While these things might offset to create a market recovery, there’s no way to price in the expected cash flow for a company that doesn’t exist.

matthewdgreen 7y ago
Traders can certainly spread their bets across many companies representing a business sector, and routinely do so. This "a few firms might go bankrupt so this explains why entire sectors experience massive volatility that isn't justified by long-term revenue expectations" claim seems like someone trying to rationalize irrational human behavior.
- javagram 7y ago
  Ok, but take the airline sector for example. Maybe one or more of the airlines will go bankrupt. Maybe they all somehow survive. The price of Delta, United, American etc. gets discounted because the risk of each individual stock being bankrupted is high. But they don’t go to 0, because there’s also a chance each of the airlines might somehow survive to next year and go back to profitability. If all the airlines go bankrupt, someone will step in and create new companies in the sector by buying up the bankrupt companies’ physical assets, but the existing shareholders will lose everything despite the sector itself being viable in the long term.
  - matthewdgreen 7y ago
    It’s much more likely that the other incumbent airline businesses just soak up that business, or the loss of competition sees price hikes across the board. Airlines are hard to spin up. TL;DR if the sector as a whole is healthy, and you’re willing to balance an investment portfolio across the whole sector, then your exposure to future revenues should be fairly healthy even if one company goes bankrupt. But you’re absolutely right that prices don’t behave as though this is the case.

mrep 7y ago

A company isn't guaranteed to make it out though and if they don't, your stock is now worth zero.

jbay808 7y ago

It should also be factoring the expected future recessions in, so when one comes along, the stock price should barely move! But I don't think that market participants are nearly good enough at prediction for that to happen.