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The primary driver right now is the expectation that interest rates are going to have to rise in a couple years to combat inflation. The theoretical value of a

The primary driver right now is the expectation that interest rates are going to have to rise in a couple years to combat inflation. The theoretical value of a stock is the discounted value of all future cash flows, right? If interest rates go up to 15% in 2 years because inflation is 10%, then you have to discount the cash flows (boosted by 10% because of inflation) at 15%, rather than the current 0%. In theory rates go down when inflation does, but investors don't know by how much, and in the 80s (our last historical example) they were still running ~8% even when inflation went to 3%. This is why growth stocks like tech have taken more of a beating than value stocks like food, oil, or defense. The former rely heavily on the expectation of future cash flows, often far off in the future, and if there's an incidence of extremely high interest rates between now and then, the value of those cash flows is significantly reduced even if their absolute amount increases because of inflation. If the Fed does not raise rates or is unable to control inflation, then it behaves as you describe: stocks become much more attractive than cash, and the rational price point for a stock becomes infinite. This is how the stock markets in Venezuela and Zimbabwe have behaved: they increase exponentially, measured in their native currencies, as the currencies depreciate exponentially. In other words, investors are pricing in rate hikes in response to inflation, and assuming that this will be "controlled" inflation that raises price levels a finite amount and then disappears. If either of these assumptions proves to be false, stocks are significantly undervalued.

benlivengood 6y ago
> This is why growth stocks like tech have taken more of a beating than value stocks like food, oil, or defense. The former rely heavily on the expectation of future cash flows, often far off in the future, and if there's an incidence of extremely high interest rates between now and then, the value of those cash flows is significantly reduced even if their absolute amount increases because of inflation. I thought that the value of many tech stocks was heavily based on growth. E.g. it's not worth waiting 10 or 20 years for a tech stock to start paying 3% dividends if the price stays the same; start earning 3% or more right now instead. In that sense, selling stock due to the risk of inflation is betting both that the company won't grow as fast inflation-adjusted as it did in the past (essentially the company can't perform as well under inflation) and that inflation will still be high when the stock starts paying dividends. I am definitely not a financial analyst, just confused.
- nostrademons 6y ago
  That's true but misses an important factor: competition from other assets. The cash flow stream from most tech companies usually looks like 5 years of large cash infusions (often from VCs); a decade or two of zero cash spun off as the company reinvests all profits in growth; and then a few years to a decade of massive cash being spun off for investors. For a historical example, see Apple - didn't pay a dividend for about 15 years from Steve Jobs's return until 2012, and now regularly returns tens of billions to investors in buybacks. For a current example, see Salesforce, which makes effectively zero GAAP profit but is growing massively as they reinvest that into product development and sales. If competing investments - say Treasuries - are yielding zero now, there's no reason why you wouldn't buy Salesforce stock now and lock in those future dividends even though they're 15 years off. But if the 10-year Treasury is going to go up to 15% in 2 years - why wouldn't you sell your Salesforce stock when rates go up, buy a 10-year Treasury, quadruple your money over those 10 years, then buy 4x as much Salesforce stock right before they actually start spinning off cash as a dividend? The 1970s actually looked like this. There was a big stock run-up in the late 60s, and then a very large stock market crash (~50%) in 1973 when the Fed started raising interest rates to combat inflation. Stocks continued to trade sideways during the high-inflation, high-interest period of the 1970s, and then they really took off in the late 80s once inflation was under control and rates started dropping.
nostromo 6y ago
The absurdity of our modern markets in a nutshell: the only thing that matters is the Fed. "Largest miss of jobs numbers in history" = "Stocks hit new highs as traders expect long term low interest rates" "Largest increase in inflation in many years" = "Stocks sink as traders fear Fed tightening" Things are so bonkers now that bad news about the economy pushes stocks up, rather than down, because it means the money printing will continue.
- BenoitEssiambre 6y ago
  Well, this is sort of what the fed is trying to get away from because it is mostly true when inflation is too low and interest rates are stuck at zero which causes gridlocks in the private markets. In the current situation, signs of these gridlocks worsening or improving cause large swings. Once inflation is high enough that we can get away from the zero lower bound, government paper becomes less of a desirable asset and stops being hoarded and displacing and blocking investment in the private markets. It's a return to markets having room to breath instead of being dominated by monetary actions. As long as it doesn't go too far the other way...
  - omalleyt 6y ago
    Except now the US gov't has so much debt, it can't afford to ever get back to normal
    - nostromo 6y ago
      And US corporations too.
- refurb 6y ago
  That’s just the media trying to explain stock movements. Doesn’t mean they are right.

benlivengood 6y ago

> This is why growth stocks like tech have taken more of a beating than value stocks like food, oil, or defense. The former rely heavily on the expectation of future cash flows, often far off in the future, and if there's an incidence of extremely high interest rates between now and then, the value of those cash flows is significantly reduced even if their absolute amount increases because of inflation. I thought that the value of many tech stocks was heavily based on growth. E.g. it's not worth waiting 10 or 20 years for a tech stock to start paying 3% dividends if the price stays the same; start earning 3% or more right now instead. In that sense, selling stock due to the risk of inflation is betting both that the company won't grow as fast inflation-adjusted as it did in the past (essentially the company can't perform as well under inflation) and that inflation will still be high when the stock starts paying dividends. I am definitely not a financial analyst, just confused.

nostrademons 6y ago
That's true but misses an important factor: competition from other assets. The cash flow stream from most tech companies usually looks like 5 years of large cash infusions (often from VCs); a decade or two of zero cash spun off as the company reinvests all profits in growth; and then a few years to a decade of massive cash being spun off for investors. For a historical example, see Apple - didn't pay a dividend for about 15 years from Steve Jobs's return until 2012, and now regularly returns tens of billions to investors in buybacks. For a current example, see Salesforce, which makes effectively zero GAAP profit but is growing massively as they reinvest that into product development and sales. If competing investments - say Treasuries - are yielding zero now, there's no reason why you wouldn't buy Salesforce stock now and lock in those future dividends even though they're 15 years off. But if the 10-year Treasury is going to go up to 15% in 2 years - why wouldn't you sell your Salesforce stock when rates go up, buy a 10-year Treasury, quadruple your money over those 10 years, then buy 4x as much Salesforce stock right before they actually start spinning off cash as a dividend? The 1970s actually looked like this. There was a big stock run-up in the late 60s, and then a very large stock market crash (~50%) in 1973 when the Fed started raising interest rates to combat inflation. Stocks continued to trade sideways during the high-inflation, high-interest period of the 1970s, and then they really took off in the late 80s once inflation was under control and rates started dropping.

nostromo 6y ago

The absurdity of our modern markets in a nutshell: the only thing that matters is the Fed. "Largest miss of jobs numbers in history" = "Stocks hit new highs as traders expect long term low interest rates" "Largest increase in inflation in many years" = "Stocks sink as traders fear Fed tightening" Things are so bonkers now that bad news about the economy pushes stocks up, rather than down, because it means the money printing will continue.

BenoitEssiambre 6y ago
Well, this is sort of what the fed is trying to get away from because it is mostly true when inflation is too low and interest rates are stuck at zero which causes gridlocks in the private markets. In the current situation, signs of these gridlocks worsening or improving cause large swings. Once inflation is high enough that we can get away from the zero lower bound, government paper becomes less of a desirable asset and stops being hoarded and displacing and blocking investment in the private markets. It's a return to markets having room to breath instead of being dominated by monetary actions. As long as it doesn't go too far the other way...
- omalleyt 6y ago
  Except now the US gov't has so much debt, it can't afford to ever get back to normal
  - nostromo 6y ago
    And US corporations too.
refurb 6y ago
That’s just the media trying to explain stock movements. Doesn’t mean they are right.