The narrative the market has taken into account ("priced in") the current economic factors is tiresome. If it did, we wouldn't up at the numbers we are.

The more likely scenario is the market is disconnected with economic conditions, and the low volume seen in this rally are the same set of market participants creating liquidity while the majority watch from the sideline awaiting more news.

Thanks for saying this. The "Priced In" fallacy has been on full display since the pandemic began. As late as a few weeks ago people were still talking about a "V-Shaped Recovery" and now the narrative is changing to a long, slow recovery.

I have no claim to know exactly what's going on, but I don't think the markets are efficient, and I don't think they're random. I think decent theories are that the markets are reacting to unprecedented Fed action and/or there are a lot of retail investors attempting to "buy the dip". It's probably fair to say there are large disconnects from business fundamentals and what it actually means when economies shut down.

Howard Marks put it in a way I find compelling: "The bottom is when there's no more optimism left" (paraphrasing). If I had to bet (and I am), I'd say there is a lot of wishful thinking going on. People want mid-March to be the bottom, so they buy, and so prices go up. Prices trend up and so... more people buy. Feels like a ton of confirmation bias with big consequences later on.

I actually think we might see a change in investor sentiment once things do start opening up and everyone realizes the damage done (many businesses closed, defaults, still-high unemployment, etc.) Again, I'm no expert but it feels like a good time to be fearful w/r/t investments

Having worked in finance as a non-trader, people underestimate how group think-y professional traders can be.

Hasn't it already been pretty V-shaped? Sure some sectors are going to get hit harder than others but markets are already back to levels from a year ago

"Recovery" refers to the economy, not the stock market. You can't say the economy has recovered yet while unemployment is still going up and GDP is still going down. The idea of a "V-shaped recovery" came from the notion that demand dropped and unemployment spiked because the government imposed lock downs, and once those lock downs were removed everything would just snap back to the way they were pre-corona.

>The more likely scenario is the market is disconnected with economic conditions,

Also,

1) passive investment represents a much larger fraction of stock holdings than in previous decades.

2) a significant fraction of these passive investments are held in retirement accounts which cannot be easily liquidated.

3) another significant fraction is held by wealthy buy-and-hold investors which may never need to liquidate assets.

For the most part, I think the stock market is going to be stable for quite a while because there's really no viable investment alternatives. It's not like you can go into bonds because yields are basically nothing.

Now, if some rules are passed that allow for 401ks to be liquidated without penalty, then that might be a cause for concern.

> Now, if some rules are passed that allow for 401ks to be liquidated without penalty, then that might be a cause for concern.

The CARES act did that a month ago: https://www.businessinsider.com/personal-finance/coronavirus...

A lot of businessy people buy into some sort of magical wisdom of the market.

It’s not a particularly wise institution, and pouring money in now is just institutional players enabled by free money coming out of government. The rest are lambs heading for slaughter, as there are very significant headwinds in our future that the market has not priced in.

Exactly, and it doesn't matter whether or not markets are actually efficient when it comes to explaining this price move. People were willing to pay what they paid for stocks yesterday. Today, news is better than expected. They'll now be willing to pay more. If they believe that markets are efficient, whether or not they actually are, that'll support buying even more. So better than expected news makes prices move up. The main point I'm trying to make is that this move isn't because traders are happy there's so much unemployment.

I think you meant economists. People working in finance are usually under no illusion of whether the market prices in all the information at a given time, and are rather focusing on who does what.

I'm more talking about people in business in general. You'll see alot of posts on HN where people have faith-based belief in the market, for example.

Finance people make their livings working around information asymmetry and optimizing for market outcomes. (But remember, the thumb is on the scale, and many are too big for the institutions to fail!) If the market were magically aware, they wouldn't have a job.

The sophisticated participants are well aware of the economic realities, but as long as there's money to be made (eager retail investors tagging along), they'll keep this up, because why not?

There's an obvious moral hazard for these larger players, because as it stands today, heads they win, tails we all lose. We have a defacto policy of socializing risk for financial institutions.

You're not hearing about money guys jumping out the window in 2020 or 2009 like in 1929. The firms are corporations that insulate the principals from the risk. (Until about 20 years ago, many of the big players were limited partnerships, for example)

If you're so sure of that, I hope you are shorting the market.

I don't have the cash or the time to do that.

My approach was to allocate my portfolio to 50% cash/short term bond in the fall/winter as a reaction to other factors that I wasn't personally comfortable with. I'll start dollar cost averaging into a more equity focused allocation later in 2020 or next year.

It's too risky for me right now, Federal policy is so unpredictable and insane you have no idea what will happen. For example, the proposal floated last night to delay 2019 tax filings to after the election will bankrupt states with income tax, whose policies didn't forsee a madman POTUS.

If we end up in a depression-like state, i may use the cash to keep my house, etc.

I'm not prepared to take the unlimited downside on that, but I did largely get out of the market recently. The Dow hit the 7000s in the last recession, and every indication is that this one will be far larger.

Theres many ways to do that without unlimited downside. Buy long dated puts. If you really think the DOW will hit 7000, then buy gold because everything will crumble. What bad news do you expect to cause the market to decrease by 70%? States are opening up with success and even South Dakota who did absolutely nothing seems to be doing pretty well

> What bad news do you expect to cause the market to decrease by 70%?

The recession we've just entered?

> States are opening up with success

Sure, and the Iraq War was winding down back in 2003.

https://en.wikipedia.org/wiki/Mission_Accomplished_speech

When companies miss their revenue by 5%, the stock plunges. We're in a reality where whole industries are nuked.

I'm friendly with the guy who owns a gas station franchise -- his business is down 90%. The oil company, CocaCola bottler, candy distributor, Frito-Lay franchisee, gift card network, etc are all feeling that.

I am also suspicious of the market disconnect from the broader economy, but I wonder what the Fed is up to. They have announced they are going to purchase corporate debt, among many other things. In the last recession, they didn't report everything they put money into and it took an act of Congress to get a limited report of their otherwise unreported activities.

Totally second this notion as there is no actual transparency into the market so no-one (save for maybe a select few insiders) actually know whatsup.

Anyone who claims to know things (beyond an idea, theory, or speculation) about the equities market at large whether on HN or anywhere is outing themselves as full of it.

This underlying opacity cannot be ignored for flies in the face of all the 'already priced in' arguments and 'rational actor' notions.

The official rationale is bank stability and credit requirements needing a certain minimum amount of liquid cash by law and it is collateraled loans. (Although corporate bonds as collateral is a concerning escalation as either needing to take them as they were out of free treasury bonds or worse given needlessly.)

Do you know what sort of things were otherwise unreported?

I'm also a bit suspicious (apolitically) about the current administration's 'attention' to the stock market. It's uncommon to see presidents tweeting all-time highs every week and it wouldn't surprise me if in a few years from now we found out some shady propping up had been going on.

There is also the drug addict reaction where more bad news means more QE coming means markets up rather than down.

To me this indicates that the financial markets are a terrible measure for the economic experience of most citizens. They are their own system that’s not connected to most people’s economic reality. I have no problem with that but for national policies we should stop looking at financial markets or GDP but try to optimize for average income or purchasing power.

The market reflects, rightly, that while the situation doesn’t look good for many certain fundamentals haven’t changed drastically YET.

For example, infrastructure is still intact, demand is theoretically still there just suppressed, capacity to produce is still theoretically there.

Unemployment is based on employers short to medium term outlook. I.e. Can I pay this person for a month and will the person be a net positive?

So the two measures differ and in weird situations like now we see how much they differ.

You can’t bring a new business or new hires up to speed instantly. Not only are the lockdown months already lost but there’s a ramp up period. Further, some of the companies in the index likely won’t survive. Even if they will be replaced down the road that shouldn’t be reflected in the prices of currently existing companies.

The priced-in explanation is not plausible.

Or rather, it reflects that this what people believe.

If you’ve been following the headlines for the past month, there’s always some reason. Easy enough to pick something out of the air—“Chinese-American sniping less aggressive”, “Oil futures markets not quite so screwed up”, “a drug shows promise in an n=20 study” but the fact of the matter is that neither the headline writer nor anyone else really knows why the market is rapidly erasing all of this year’s losses and trending towards all time highs while economic output continues to crater and companies go bankrupt.

Perhaps investors believe that governments will do whatever it takes to make investors whole given the political power investors wield through their votes and political donations. Perhaps they are even correct. Why don’t headline writers say that? “Stocks continue to rise while unemployment goes up because rich people confident they control governments”? It’s as likely or more to be true than the “priced in” narrative they’ve been hawking.

CNBC and financial publications always love to attach a narrative/reason to every stock movement. But the fact is nobody knows. There are just too many participants, each with their own agenda and prejudices.

The “priced in” narrative is just another made up reason, but as you said, it could simply because investors believe the government just won’t let the market fail.

The problem with saying things are 'priced-in' is that it's a basically worthless statement. There are so many things priced in, that it is impossible to know or understand them all. Some are right, some are wrong, and many are in-between.

I am an efficient markets believer, but I think most of the talking heads are a bunch of hot air.

It is a very worthless statement if you really think about it. Everything is priced in.. because that's literally the definition of a price - it's the cumulation of everyone's belief of what is going to happen. That's like saying water is wet.

The Fed’s actions are the only rational explanation. Many large companies who had access to the investment-grade bond market were locked out and having to raise as if they were junk quality. Then Jay Powell said the Fed would buy corporate debt and would pretend that everyone’s credit rating was the same as before the crash in March.

The market hit a hairpin turn around that time and started heading up.

shrug

Why is it a given that the stock market is reacting based on reality instead of the alternative (that the modern stock market is almost entirely divorced from "the economy")?

The stock market is both reacting on reality and is divorced from "the economy," and will continue to become more and more divorced from "the economy" as long as the financial performance of publically traded companies continues to be divorced from GDP. The stock market value is the expected net present value of the cash flows of the assets that make up the market (realized through dividends, buybacks, exits, etc) (and keep in mind that the expectation can be and will be wrong/influenced by behavioral factors etc - expectations are calculated by humans). Today, lower unemployment than expected meant that traders believed companies' bottom lines will improve as more people than expected might have incomes and spending money. Take for granted that the market price yesterday incorporated the expectation of 16% unemployment (and I notice some argument that it doesn't - it's pretty much irrelevant if it actually did or didn't when it comes to explaining the price move today. People were happy for whatever reason to pay the price of the stock at market close yesterday with what they knew about the economy. Now that the news shock is positive, on average, they will be willing to pay more than if they recieved no news). Then, with good economic news, that investors believe will mean an increased net present value of the stocks on the market, you'll see prices go up.