This is what I keep seeing lately in media and opinions of all sorts of people. While it is true that the Market seems detached from reality, the problem is elsewhere. One day, we may see another leg down (or maybe not) but those who bet for it to happen soon may become broke long before it actually happens… if it happens.
Here are the reasons why I disagree with all the gloom and doom predictors:
Today, most of the market trades on faith. Like it or not but it is a reality. It is the same as with dollar. Since I have ever been aware of a currency named “the US dollar” for the first time in my life, I kept people predicting its demise, collapse, and being substituted by other, more reliable currency, such as Russian ruble, German Deutche mark (when it existed), Euro, or Chinese yuan… Fast forward some 50 years, and we still have the US dollar around and it still is a world reserve currency no matter what the US government does and have been doing to it for years, and no matter how irrational you may think FED and Treasury is. People still believe in dollar despite gloom and doom predictors foreseeing its inevitable bankruptcy… The stock market is same. As long as people/investors believe what FED and other players do in this market/economy, it will not crash just because you think it is irrational.
And yes, FED plays a very significant role in all this. Powell has been signalling all day long that they will do anything and everything needed to keep the music playing. They are literally converting the stock market into the US T-bills… No matter what you and other players do in the market and to the economy, you are guaranteed a bailout. The FED will not let your investment go under. Yes, some individual stocks may go down, but the overall market will be let floating with as much hot air as possible. You do not like it? Well, me neither. I think it distorts the very prime function of the market but, hey, if it makes me money with less risk, I will go for it with absolutely no objections. And if FED makes me believe they will protect my investment, great. I will deploy money fullhandedly… And millions of other investors, traders, hedge funds, and big houses believe it too. We are back to the “faith” thing.
3) Comparing today’s market with today’s economy
It is a known phenomenon about the market that it is “predicting the future of economy” up to 6 months ahead. It is not a true prediction of the economy as no one, even the market itself, can predict the future. This means that in fact, the market is looking at the future economic expectation of where the economy might be 6 months from now. Investors, mainly those predicting the next crash seem to be forgetting this. If you think that the market is irrational because the “economy is in a very bad shape, we are in recession, we are going to crash, we will have a huge unemployment…” and who knows what else and so the market is manipulated and will crash soon, then you too fell to this same trap of comparing two incomparable time frames. Today’s market no longer cares. All this doom and gloom you are seeing coming – 25% unemployment, 34% GDP loss, crashing EPS… all that was already priced in the market back in March when we lost almost 40% of the market value. The market no longer cares about this. What it cares about is what the future might look like. We are reopening our economies – great, great news!! Companies will be hiring again, consumers will be spending again, recovery will be faster than we expected… All the gloomy economy suddenly is not that gloomy. Then add to it, that the unemployment is not 25% but only about 14% and some… Another great news! Recent earnings were not down more than 25% as expected and GDP didn’t drop by 35% as predicted. Another awesome news! Is it bad? Yes, it is, but not as bad as we thought. Add vaccine on top of it and music will go on.
Will we crash again?
Maybe. But not before the optimism of better bad than worst future fades away and market realizes (again), that all the great and bright future economic expectations were too optimistic. Then we will correct that optimism again. Remember, the market doesn’t know where the economy will be. It only expect it to be at some point in the future. If that expectation was wrong (too optimistic) we will correct. If it was still too conservative we will, shoot even higher. It is all perception. And fighting that perception can be costly. So far, optimism rages the Wall Street and it may take years before it goes away.