Many people (politicians?) like to point to the S&P 500 when talking about stock market growth.
What is a better index or metric that captures the overall health / growth of the economy?
stocks have never been more detached from the underlying economy than now - i mean look at the total market cap of US stocks to GDP - it’s something like 170%
Economic indicators (CPI, GDP, unemployment) are backwards looking, while stocks are generally forward looking.
The S&P 500 peaked around mid-February and then started tanking. Meanwhile, in early March:
> On March 2, New York City Mayor Bill de Blasio tweeted that people should ignore the virus and "go on with your lives + get out on the town despite coronavirus."[73][74] At a news conference on March 3, New York City Commissioner of Health Oxiris Barbot said "we are encouraging New Yorkers to go about their everyday lives."[75]
* https://en.wikipedia.org/wiki/COVID-19_pandemic_in_New_York_...
Cuomo then declared a state of emergency on March 7—at least two weeks after stocks started 'acting'.
The stock market (as 'an entity') dislikes unexpected news: as new information ripples out, the Efficient Market Hypothesis purports that will effect prices. So if a company says a quarter or two will be good, and it turns out bad, their stock price will effected by that new information. But if everyone already knows that things will be bad, when the bad news is announced there won't be much of a reaction.
You can have bad news as long it's expected: the pandemic was unexpected and so everyone had to re-organize their strategies. That was February to March.
Now that the pandemic is more of a know quantity, and its effects of society are more well-known, people can focus on how companies will deal with it: it's generally bad for cruise lines and airlines (stocks down), it's generally good for companies that help with work/shelter-in-place stuff like Zoom/telcomm and cloud (stocks up). What was April onwards.
Yes, the economy does suck. But stocks are about forward looking expectations, not about the now or past.
my point is we aren’t living in a world where a stock is simply the present value of future cash flows and no one should rationalize the market as such
* https://www.investopedia.com/terms/m/momentum.asp
Also, it has just recently become eligible to become part of the S&P 500 (through some perhaps 'amusing' accounting), so a bunch of folks may be front running it's possible actual inclusion:
* https://www.thebeartrapsreport.com/blog/2020/07/19/gaming-th...
Though long-term stock holders may not actually want inclusion:
> When applied, an investor can buy or sell based on the strength of the trends in an asset's price. If a trader wants to use a momentum-based strategy, he takes a long position in a stock or asset that has been trending up. If the stock is trending down, he takes a short position. Instead of the traditional philosophy of trading—buy low, sell high—momentum investing seeks to sell low and buy lower, or buy high and sell higher. Instead of identifying the continuation or reversal pattern, momentum investors focus on the trend created by the most recent price break.
Momentum is a recognized factor in investment returns in peer-reviewed research:
Everything in the world effects everything else in a very complicated manner. Almost anything that happens will have some indirect effect on tesla / walmart.
I wont pretend to know the reason, or that there is a reason this particular time. But indirect news do affect prices regularly.
People buy a Tesla because they want a Tesla. Any old car will not do - the typical Tesla buyer is not considering a Toyota or a Subaru or even a Leaf. (They also tend to be fairly high-earning, and in a profession where they can capture much of the increased prices from inflation.) When more money goes into the economy, Tesla's buyers capture a good fraction of it, and then Tesla can raise their prices to match.
Nobody shops at Walmart because it's Walmart. They shop at Walmart because Walmart has the lowest prices. Now, Walmart is being undercut by Amazon (whose stock is rising as they steal business away from Walmart). If there's inflation, will Walmart be able to raise prices? Probably not by very much, because if they do, Amazon holds their current prices and Walmart loses even more business to them.
It's the same story for Apple, which has roughly doubled in the last 4 months. Did the value of Apple double in the last 4 month?. Certainly not in real terms. But in nominal terms - probably. I could easily see a future where prices in general are double today in 5-10 years, and the price of an iPhone is likely to rise to keep pace. During the 1970s, prices rose by roughly 10x on average, though the impact was widely disparate on different professions. (At the beginning of the decade, my mom - a teacher - was make maybe 20-30% less than her engineer/lawyer/academic friends. At the end of it, they were making about 3x what she was.) If anything, the market may be understating the effect of inflation on certain company's earnings, perhaps because a lot of people don't believe we're going to get inflation.
maybe so.
> i mean look at the total market cap of US stocks to GDP - it’s something like 170%
but doesn't this make sense? I would expect the total market cap of public companies to be worth more than a single year's productivity.
specifically it’s the ratio of the wilshire 5000 over GDP
It seems to me that 170% is clearly not evidence of the stock market being overvalued, while not being clear evidence it is undervalued either.
If you disagree, what tells you the appropriate number? It seems like not knowing the portion of the economy outside the stock market, and whether it has gotten bigger or smaller, rules out knowing what the ratio means.
Another thing I just thought of is that public companies draw on the global economy, but the "D" in GDP is domestic.
And yet another thing I thought of is, what about the Net Domestic Product? TIL there is such a thing, although it isn't tremendously smaller than GDP. It appears substituting it would bring the ratio closer to 200% or 2:1.
I haven't done the research, but: how much have the underlying dynamics changed, though? Has concentration increased the percentage of GDP that goes through public companies?
In other words, if 20 years ago, 25% of GDP flowed through US public companies, and now it's 35%, you'd expect the ratio of public companies' capitalizations to GDP to increase a lot.
I'm not saying this is good or bad, but it wouldn't be "detached from the underlying economy", it'd be a direct reflection of it.