WSJ: Why is the stock market rallying when the economy is so bad?

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The stock market is rallying despite 14.7% unemployment, plummeting consumer spending, and a sure recession. Why?Bets on a V-Shaped Recovery

1. Bets on a V-Shaped Recovery.

  • “Many analysts are looking past the grim economic data, forecasting a speedy recovery as state economies open back up across the country.”
  • States reopening is encouraging investors on a rapid rebound in 2021
  • COVID-19 cases moderating in the US
  • News on signs of a potential vaccine

2. Market leaders keep rising

  • “the recent rally reflects the outperformance of a handful of stocks. Big technology companies, which are heavily weighted in the indexes, have driven much of the rebound”
  • “Five big tech stocks  Microsoft Corp., Apple Inc., Amazon.com Inc., Alphabet Inc. and Facebook Inc.—together make up about 20% of the S&P 500. Those companies have benefited as Americans around the country have been sheltering from the pandemic at home, spending time on social media and ordering home essentials such as groceries online.”
  • “the entire energy sector constitutes just about 3% of the broad stock-market index. That means the companies that have suffered the most have little sway over the market’s direction.”

3. Corporate-Earnings Expectations Remain High

  • Analysts are projecting earnings to bottom in the current quarter with a 41% drop—and rise 13% in the first quarter of next year.
    • JO: I disagree with how deep earnings will drop. 2008 saw 90-100% drop from peak to trough

4. Old Habits Die Hard

  • “investors find themselves faced with few attractive alternatives if they opt out of betting on stocks. The problem is so familiar it has its own acronym: TINA, or There Is No Alternative to stocks.”

5. The Fed’s Backing

  • “The Fed made it clear it was willing to step in to buoy the economy. Why bet against the market when the central bank is willing to do that?”
  • Interesting, do you see the S&P continuing to rally until a certain point? How long is the Fed capable of doing this for? Is there any point in which the big 5 tech stocks can tumble even if we continue to use them?

    • Yes, the funds flows between risk assets and safety assets will affect valuations across the board, regardless of businesses. Undervalued and strong businesses will just see less of a downtrend than overvalued and weak businesses

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