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?”
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  1. 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?

    1. 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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