What is up with the stock market?

The US unemployment rate is 14.7%, the worst since the Depression.  Here in LA County it’s 24%.  We’re not supposed to leave our houses for non-essential purposes or go to the beach.  Every bar is closed, almost every store is closed.

And yet the “stock market” is not really down that much.  Here is a one year chart of the S&P 500, which The Wall Street Journal often uses as a standard benchmark for “the stock market.”

Actually a little higher than it was same time last year.

How can this be?

There are many explanations offered by people better informed than me.  Here is Gunjan Banerji’s take in WSJ, and Joe Weisenthal in Bloomberg.

Both point out:

  • the belief in a v-shaped or “Nike swoosh”* recovery
  • the Federal Reserve keeping interest rates at close to zero
  • the Federal Reserve buying $2.4 trillion in government debt, and indicating it would buy more, making it clear that the government can inject essentially infinite money into the economy, “backstopping” everything.

As an amateur enthusiast on this topic, I’d like to offer some additional explanations.

  • The stock market is rigged to go up.  This is just a sort of understood but rarely stated fact.  The stock market is one of the few measures the President cares about.  Every tool at the disposal of the administration and at the supposedly independent Fed is used to keep the stock market up.

 

  • The stock market by definition is big, public companies.  These are the S&P 500 companiesBig companies are benefitting from the demise of their various small competitors.  Big companies can survive by taking on debt in ways small businesses can’t.  They did a great job getting a chunk of the federal money made available.  Consider if I have Steve’s Burger Stand.  I just don’t have the bureaucratic ability, relationships, time, to get a loan the way Shake Shack did.  If anything, are huge companies are seeing their small scale competitors destroyed?
    • Kind of an addendum to the last one: the federal government gave out the free money via big banks like Wells Fargo, Bank of America, BlackRock which themselves are part of the S&P 500!  Big boys feed first!

 

  • Money has nowhere else to go.  The Fed’s actions reduce the benefits of alternative investments like bonds or just putting your money in the bank.

 

  • Trading has become free! I feel crazy that this never gets mentioned.  Starting with Schwab (I think?) last fall, and then flowing on to competitors, trading stocks became free.  Instead of $8 or $4 to trade stocks, it’s free!  You might think this might’ve just created more volatility, maybe it did, but once the barrier to entry for the retail investor is zero, it’s as easy to flow your extra money into the stock market as it is into the bank.  This is, in my opinion, a dangerous or at least explosive change that hasn’t really been reckoned with.  See what Robin Hood is up to.  It might be as easy to bet your money on Tesla or Amazon as it is to tuck it away in the bank.  It’s frictionless, it can be done on your phone.  That might be dangerous!

 

  • There’s nowhere else to gamble.  Again, I feel crazy that this is never acknowledged as a factor.  Consider that Americans spend something like $100 billion on gambling a year.  At the moment, there’s nowhere to do that!  Casinos are closed.  Sports are stopped.  I do not think it’s unreasonable to imagine there are billions of dollars in gambling money going into the stock market as simply a place to gamble and trade.  See Dave Portnoy of Barstool Sports, who personally injected half a million dollars.

I’m not here to make predictions.  It’s probably a cognitive bias to believe the stock market “deserves” to go down, but that’s what I believe.  Then again, when you think about the stock market, it’s not just rich assholes, it’s like the pensions of firefighters and teachers.

Is it possible that the stock market is not calculating the biggest risk, some kind of massive social upheaval coming from disgust at this system?  The stock market is not built to calculate “what if we ruin society, make things so unequal and so unfair and grotesque that this system no longer functions?”

Maybe that’s “baked in” as they say.

So said Warren Buffett at the annual meeting.  Happened to be reading this speech by Stanley Druckenmiller from 2015 which I found on Valuewalk:

Remember your competition:

This chart is illuminating:

It’s good for me to write about the stock market, because I’m guaranteed to get an email saying something like you stupid clown you don’t understand anything.  But the more I study the stock market, the more convinced I am that sometimes the experts, overwhelmed by information, become blind to the obvious.  Consider this case reported by Bloomberg as a representative example.  Do you really need to use a machine-reading program to determine that things are looking a bit grim?

There’s the famous story about Joe Kennedy knowing it was time to sell when the shoeshine boy gave him stock tips (bullshit, he was insider trading).  What if you’re the shoeshine boy?

* I don’t understand the Nike swoosh recovery idea.  Isn’t the long part of the swoosh roughly equal to the short part?  So in a swoosh recovery, wouldn’t we just take a very long time to get back to where we were?  and that’s the optimistic take!



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