For investors, it makes sense. Shares have risen more than 40% since late March as the cavalry have arrived after the worst damage from the coronavirus recession has passed. Now the Federal Reserve is propping up risky assets, Congress is pumping money into the economy, and some of the millions of lost jobs appear to be recovering.
But if you are a normal person who thinks that raising the ball is crazy, you are right. There are no correct or incorrect valuations for any action or for the market in general. There is only the value assigned by the market at any given time, according to supply, demand and other factors. But the demand for shares (investors submitting purchase requests) is out of sync with what is happening in the real economy, where the unemployment rate has soared from 3.5% to 13.3% in just three months.
Traders are correct in saying that the stock market evaluates the future and not the past. Retrospective economic data on what happened last week or last month is irrelevant when setting the value of the shares unless they suggest future measures, such as unexpected changes in Federal Reserve policy, but it costs Imagine how actions are evaluated for the future. 2025? 2030? If so, we are talking about a time horizon so distant that it practically makes no sense.
These are some of the nefarious events that economists forecast over the next 12-24 months:
<p class = "canvas-atom canvas-text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "Widespread bankruptcy of small businesses. “Small businesses with a few employees are expected to go bankrupt en masse,” Moody’s Analytics analysts say in their June 2 projections. “Of the 8 million commercial establishments that operated in the United States before the crisis, it would not be surprising if close to a million did not reopen. Eventually, new businesses will open and the economy will recover, but the process will take years, not months. ” Many of these small businesses do not have the necessary connection to banks to qualify for federal aid. Commercial bankruptcy filings soared 48% in May from a year earlier, a foretaste of the looming butchery. “Data-reactid =” 16 “>Widespread bankruptcy of small businesses. “Small businesses with a few employees are expected to go bankrupt en masse,” Moody’s Analytics analysts say in their June 2 projections. “Of the 8 million commercial establishments that operated in the United States before the crisis, it would not be surprising if close to a million did not reopen. Eventually, new businesses will open and the economy will recover, but the process will take years, not months. ” Many of these small businesses do not have the necessary connection to banks to qualify for federal aid. Commercial bankruptcy filings soared 48% in May from the previous year, a foretaste of the looming butchery.
<p class = "canvas-atom canvas-text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "Productive losses worth trillions of dollars. The Congressional Budget Office estimates that the recession caused by the coronavirus will cost the US economy 15.7 trillion by 2030 in terms of the real productive economy, adjusted for inflation, with a total drop in production of 5.3 %. That means seven full months of economic inactivity, which will crush employment and income well into the decade. “Data-reactid =” 17 “>Productive losses worth trillions of dollars. The Congressional Budget Office estimates that the recession caused by the coronavirus will cost the US economy 15.7 trillion by 2030 in terms of the real productive economy, adjusted for inflation, with a total drop in production of 5.3 %. That means seven full months of economic inactivity, which will crush employment and income well into the decade.
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The May employment report showed an unexpected increase in non-farm payrolls (David Foster / Yahoo Finance).
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<p class = "canvas-atom canvas-text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "A long and slow job recovery. IHS Markit thinks employment will not recover to its pre-virus levels until 2024, despite the surprise creation of 2.5 million new jobs in May. Job growth in May is partly due to the return of some workers to affected sectors such as travel and retail, but statistical anomalies in the government survey may have left some unemployed workers out of the count. And employment cannot be fully recovered until there is a vaccine for the coronavirus, which will take more than a year to come at the earliest. Meanwhile, Congress may refuse to pass more stimulus measures, something many economists think is still necessary. A month of optimistic job numbers could be a mirage. “Data-reactid =” 38 “>A long and slow job recovery. IHS Markit thinks employment will not recover to its pre-virus levels until 2024, despite the surprise creation of 2.5 million new jobs in May. Job growth in May is partly due to the return of some workers to affected sectors such as travel and retail, but statistical anomalies in the government survey may have left some unemployed workers out of the count. And employment cannot be fully recovered until there is a vaccine for the coronavirus, which will take more than a year to come at the earliest. Meanwhile, Congress may refuse to pass more stimulus measures, something many economists think is still necessary. A month of optimistic job numbers could be a mirage.
<p class = "canvas-atom canvas-text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "Bank stress. Many companies in bankruptcy or restructuring will default on debt payments to banks and lenders. Banks are not fragile or over-leveraged as they were before the 2008 financial crisis, but an unforeseen shock of the magnitude we are experiencing now could sink some lenders. “Data-reactid =” 44 “>Bank stress. Many companies in bankruptcy or restructuring will default on debt payments to banks and lenders. Banks are not fragile or over-leveraged as they were before the 2008 financial crisis, but an unforeseen shock of the magnitude that we are experiencing now could sink some lenders.
Investors clearly think that the Federal Reserve and other central banks can weather these problems, and the Federal Reserve certainly has the power to intervene in the mass economy. However, what you cannot do is create demand. That requires businesses and consumers to have confidence that the coronavirus is gone, that working is safe, and that there’s no problem with spending money.
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In this March 3, 2020 file photo, Federal Reserve Chairman Jerome Powell speaks during a press conference to discuss an announcement by the Federal Open Market Committee in Washington (AP Photo / Jacquelyn Martin).
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Most states are already easing confinement restrictions aimed at stopping the spread of the virus, and economic activity is slowly recovering in places, but job losses, business closings, and lost spending also cause structural damage to the economy that will take years to repair.
These losses of jobs and companies will be important for the stock market, because they have an impact on the profitability of many public companies and the solvency of some of them, but the power of the Federal Reserve is superior to all this, or to the less investors think it is so. “The unprecedented support from central banks has helped prevent the great economic shock caused by the virus from turning into a financial crisis,” Capital Economics explained to its clients on June 4. “We think many risky assets could continue to outperform.”
Therefore, this buoyant stock market makes no sense in relation to the devastation that is taking place in the real world, but it makes perfect sense given that the Federal Reserve and other central banks are driving the rise in stocks to rebuild confidence in a part of the economy. Are you skeptical about the performance of the stock market? Does it encourage you to invest? In both cases, you are right.
<p class = "canvas-atom canvas-text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "Rick Newman“data-reactid =” 69 “>Rick Newman
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