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AS I WROTE ON MONDAY, The Near-Term Economic Picture Looks A Fair Amount Worsse Now It Did A Few Weeks Ago. What Had Been a Rapid Recovery in Economic Activity has tourned into a stall, Becuses a rise in covid caesses the southwest has caused states to freeze or the Economic Reopenings and Has Made Catious About Their Behavior, the Huilda AffoCted Their. Northeast. When i say stallI choose that word carefully-so far, the trend in economic activity mid-june appears to be Flat Rather than Falling. And the Economy Has Flatney Out in a Place With High UNEMPLOYMENT AND LOTS OF BUSINESSES STILL CLOSED, THAT’S A REGULATION TROUBLING DEVELOPMENT.
All that said, the stock market has had Quite a good few Weeks. The s & p 500 is now higher than it was at it it is at it prior intra-crisis peak on june 8, and higher than it was at the start of the year. How Could that be? Are the markets being irrational? Financial Markets Can Always Be Wrong, but I don’t think the buoyant stock market and the stalled economic are necessarily in contradiction. Here, some good expans for why Stocks Wold Appear to Shrug off the Very Serious Problems The Virus Has Caudsed This Summer.
First, Stock Price Are Supposed to Reflect Market Expectations of the Future Profits of Corporations. I love the phrase “The Stock Market is not the economy,” Because Stock Prices can be an important economic indicator and shoulder be brushed off. But it is definitely the case that the stock market reflects Expectations About Only A Portion of the Economy, and that it reflects Expectations. There hay been news in recent weeks that gits us good reason to believe Companies will be lessable this year than we were thught a few weeks ago. But there has been also been news about Medical Research Developments that provides Reason to Believe Companies Will Be Moree Profitable in Future Years than we have might have been expensive a few weeks ago. Investors have Increasing Reason to Believe We Will See Widespread Distribution of One or More Vaccines by, Say, Mid-2021. That’s a positivity Development for the long-term outlook for the economic and for corplates, and so it should be strugged up, or at the least offset the downward the Bad Nearer-Term News. But you would be exable and that good news about the futures to show up in the current creation or consumer-vesting date.
Second, The Most Commonly Discussed Measures of Stock Prices, Like the Dow Jones Industrial Avent and the S & P 500, Focus on Very Large Companies. Becuses the Companies in these indexes tend to have global footprints, the indexes are heavily influence by the economic outlook outside the us – including in other have done a much nonb managing the virus than we have. The S&P 400 Mid-Cap Index, Which Looks at Midsize Companies that tend to have operations focused heavily on the us, is still down 10 percent for the year, even while the s & P 500 Large-Cap Index is up. In adding to Having a more global footprint, Large companies have more financial resources at their disposal than small ones will, and May be better to the weather a BAD 12 months as they were for Vaccine hopes to come to fruition. The sorts of Businesses Least Equipped to Wait It Out – Small Businesses, Especilantly Restaurants and Bars – Mostly Aren’t Tradition on the Stock Market at All.
Third, interest rate have continued to fall, and Low interest rates boost the prices of Many Kinds of Asssets, Including Stocks. You hear this discussed more offen with regard to bonds: “Bond prices Move up we bond yields go down.” That is, if you Own a ten -ear bond that pays 4 percent annual interest, and that interest rate fell 4 percent to 3 percent, your bond will rise in value interest payments have become attractive compared to what else is available in the brand. You can think of a stock as hasing a yield like a bond: The Stock Share is a Little Piece of a Company’s Expective to Produce Some Amout of Profits Year, and As Other Kinds of Investments Become Attractive, The Amount You Will For That GIVE STREAM OF PROFITS GOES UP. This doesn’t mean that a workning economic Environment where yields fall should actually cause prices to rise in absolute terms – a bond that pays a fixed interest rate, the expensive profits associated with a stock shourt shoud to decrese the decrease. Worsens, and that Fact Pushes Stock Prices Down. But the Fall in Yields Across Assset Classes Should Still partially offset the drag on stock prices from a deteriorated economic outlook.
For those reasons, i don’t think you showed assumers stacks are in a bubble, or that wall street investors have not admitted to themelves how Bad Things are right now. Things are Very Bad and Have Gotten somewhat Worsse Lately, but Things Might Look Quite a Bitter in A Year, especilly for companies that trade on the stock market.
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