Judging from much of the reporting lately, the stock market is high and rising and simply cannot sustain its lofty position. While I never predict stock prices, I can at least spout off a bit about these people who seems so sure that stock prices have to fall.
On the face
of it, the intuition seems easy. The
economy is horrible by most current measures (it fell 33% in the second quarter
of 2020 when measured by real Gross Domestic Product) without real hope for a lasting
recovery so long as Covid rages on. Meanwhile, the stock market has risen lately
and has reached some very lofty numbers.
So I thought
I would look at some numbers. Below I discuss data for the S&P 500. I use a measure of change in the valuations of 500 major US corporations. I did
this comparison on July 29. The value of the S&P on that day was 3258.
3258 looks
very impressive when compared to the end of March 2020 when it registered 2611.
Wow. That pops your eyes out. In just a few months, the market rose by about
25%. Since March, the S&P rose continuously, though with a lot of variability.
We might
forget that March 2020 was a very bad month for the country and the stock
market. Just two months earlier in January of 2020, the end of month S&P
value was 3284. In those two months, the S&P value fell from 3284 to 2611.
Yikes. Ugly.
Notice that
the July value of 3258 remains below the January value of 3284. So yes, we had
an incredible upward spike since March, but we see that between January and
July we had zero growth in the S&P. Does that sound like an unsustainable increase?
Or is it simply a rebound. Bouncy ball. Ball went down. Ball came back up?
What about
longer periods of time?
At July’s
S&P value of 3258:
It was 1 percent lower than in
January of 2020
It was about 7 percent higher than
July 2019
It had risen by about 8 percent per
year between July 2018 and July 2020
It has risen by about 10 percent per
year between July 2017 and July 2020
What do you
do with all that?
My take is that the S&P increases mostly happened prior
to 2020
The most recent S&P increases still have not gotten us
back to January
You might say,
okay, the current increases are not remarkable, but still – why hasn’t the
S&P fallen commensurately with the second quarter real GDP? Why hasn’t the
stock market fully registered the worry about future declines in the economy?
And my
answer is this – I don’t forecast stock prices. I don’t know how much the stock
market “should have fallen.” I cannot read the minds of the public about future
Covid, future real GDP, or future shooting stars.
But I do know that all those false prophets of doom have more to explain about why they are so sure stock prices have to collapse. As for me, I don’t see a sell opportunity. I guess we will see. Meanwhile there is always Jack.
I have no answer. Although experts in the past say do not always use the stock market as a barometer for the economy in the short term. It is just like claims that 3,000,000 jobs were created but digging deeper those were jobs lost due to closing of certain business and or facilities. When the mask issue opened up ( and then closed again) the jobs returned to some degree. Indirectly, the closing and opening basically just lost and returned some jobs....no creation of jobs direct ,
ReplyDeleteIf you had a real answer you'd be rich.
DeleteDear LSD. In the Deep Six Tuna School of Day Trad’n we be taught that Pisces constantly seek shelter from bigger cannibalistic Pisces and nourishment via smaller Pisces, algae, coral, or other edible smaller sea dwellers. With those basic needz met most of us being cold blooded don’t have much concern fer stay’n warm. All’n’all it’s a Pisces eat Pisces wirld down here. Ya’ll up there gotz a similar parallel sitsiazun but instead of meet’n basic needz some of ya seek ROI like a tuna seeks anchovies. Our text bookz down here show that your uptown terra firma land creaturz constantly seek ROI and therefore keep prop’n up your main investment doo-da the stocking market where you sock away all yer hard-earn moola. Sometimz it goes up; sometimz down. Current alternative investments don’t have the history of long-term ROI as do equities so ya’ll uptowners will continue to chase ROI and prop up your stocking market. Deep Six class lessen 501 is available via on-line conch chat rooms and coconut telegraphs.
ReplyDeleteDrinking so early in the day Tuna? Not sure where you are heading with all that. Us terrafirmers sometimes need a little more guidance.
DeleteDear LSD. Need a little more guidance, eh? Surprising you find my ‘splanation so oblique given most uptowners’ ‘n terra firma eyes are not confounded by murky diffused sun light at depth. Put simply, ya’ll chase ROI ‘n that keeps the stock’n market ROI ever increas’n. Elementary, my dear LSD.
ReplyDeleteNot so elementary. Not always about ROI. People buy stocks to accumulate assets -- to save. Buying stocks raises the price of the stocks and thus the value of stock indices. Exactly why world investors have chosen to buy more US stocks, I don't know. Clearly zero interest rates on bonds helps. But I doubt that is the only reason.
DeleteNot alwayz ‘bout ROI? Then why accumulate if no return . . . ? Why accumulate assets if no value appreciation/ROI? Jeeze, why would wirld investors buy ‘merikan? Heck, dunno . . . maybe ‘cauz they’ll git a ROI not available elsewhere? As you say in your blog yer glad you didn’t sell in July . . . wuz that ‘cuz yer git’n a ROI or cuz you juz wanna accumulate assets?
DeleteThis might be an issue of semantics. When people say its all about ROI, I interpret that to mean that people are active traders who attempt to maximize their return. Many people do that. But other people are more passive and hope to attain a ROI -- but are willing to accept a lower return that comes with taking less risk. In the later case -- it isn't about getting the best ROI -- it is about wealth accumulation occurring with a more normal ROI.
DeleteI don’t know. Looks like traditional markers aren’t having the same effect. Is idle capital finding stocks more enticing than productivity? Has staying at home with little to do and little to spend on, created a new form of entertainment? Casinos are a lot of fun, but why take the risk of infection when you can stay on your sofa clicking away buys and sells.
ReplyDeleteNice points Carlos. That's exactly why it is so hard to forecast the stock market -- too many things out there that cause changes. I wonder about foreign capital. Not much has been said about that. Despite the US negative news about the economy, the US is often a haven for money when the world economy weakens. Whatever it is, I am not ready to sell. Buy and hold has always been good for me. I will stick with that!
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