What is up with the stock market?

January 18, 2021 7:38 AM

I just received my retirement account statement from TIAA-CREF from 2020. It looks like the performance was through the roof. Better performance in 2020 than in years. I am really confused: I thought we were in the middle of a depression?

So, as a non-expert with stocks and the economy, I guess I have two questions:
1) How are stock markets doing so well with so many people out of work and businesses closing?
2) Should I (well, we) be expecting a big course correction? Is this all going to crash, and I am going to lose these gains?

(I should probably state upfront that these questions are just out curiosity. All of my accounts are on long-term auto pilot.)

posted by yet.another.boston.question to Work & Money (24 answers total)

The stock market has generally performed well despite the other trouble in the economy. It’s a reminder that the stock market by itself isn’t a good proxy for the economy.
posted by kevinbelt at 7:43 AM on January 18, 2021 [21 favorites]

It's a bubble.

https://www.theguardian.com/business/2021/jan/06/ftse-100-stock-market-bubble-risk
posted by rd45 at 7:44 AM on January 18, 2021 [1 favorite]

I'm not an economist so take this with a massive grain of salt (and I hope a real economist will come in here to add some better context). But my understanding is that there is a debate within the field right now about the decoupling of the stock market from the reality of the economy as it presents itself in the average person's daily material experience (i.e. their jobs, ability to pay bills, etc.). As the vast majority of average people do not outright own stocks (for example, your TIAA-CREF account is likely made up of managed funds) and are therefore not active participants in the stock market, as a result the stock market is more of a reflection of how wealthy people (who are more active participants in the stock market) are doing than the broader workforce.

For some COVID-specific explainers on the relationship between the stock market and the economy, here is a short article and a longer Congressional Research report.
posted by mostly vowels at 7:46 AM on January 18, 2021 [1 favorite]

There have been lots of articles that explain why the stock market has done so well during the pandemic. Here are a couple: 1 and 2.

I have a modest TIAA account too and have also seen surprising gains.
posted by mareli at 7:46 AM on January 18, 2021

How are stock markets doing so well with so many people out of work and businesses closing?

The administration in charge all of last year was especially friendly towards the big businesses which trade on the stock market, and got a shit-ton of bailouts that let them stay profitable. Also, the businesses that were closing were the smaller businesses that don't often trade on the stock market - and since they were closed, that just drove even more customers to the bigger corporations.
posted by EmpressCallipygos at 7:47 AM on January 18, 2021 [16 favorites]

The disconnect between the stock market and the broader economy in 2020 is a prime illustration of how inequality in the US has been exacerbated by the pandemic or, put more simply, the rich get richer while the poor get poorer.

I expect the stock market will continue to perform strongly as long as interest rates stay very low because, from an investor's perspective, money will flow to where it will gain the most. And remember, a stock's price is not really a direct function of the company's performance, but rather an indication of how much people are willing to pay to own a piece of it.
posted by DrGail at 7:53 AM on January 18, 2021 [9 favorites]

It's not unusual. My UK pension has more than made up for the more-or-less overnight losses it suffered at the start of the pandemic.
posted by dowcrag at 7:55 AM on January 18, 2021

The stock market is complicated, but the main thing is the belief that, in the nearish future, corporate profits will increase (more) steadily than interest rates. Most of what's happened in the pandemic has tended to make stocks more attractive because interest rates are low to zero, so investors don't have better options. Furthermore, large companies have been very good at capturing the stimulus, both direct and indirect. Sole proprietors are getting $17 government loans while big companies are getting millions. Most of the stimulus funds have gone to big companies, not individuals. Furthermore, interest rates are low to stimulate borrowing (indirect stimulus), which helps companies because they tend to have lots of debt, while consumers are net creditors. Some sectors of the economy are doing really well.

Basically, picture yourself as Warren Buffet, surveying the vast range of investment options in this world. He's not going to stash it in his mattress because it will be eaten away by inflation. He's going to invest it, and the only real option is the stock market right now.
posted by wnissen at 8:18 AM on January 18, 2021 [1 favorite]

I've been asking myself the same question, and the ultimate answer is 'who the hell knows.' It's going to drop but nobody knows when or by how much. Some dofusses (doofi?) will get lucky and then be able to write a book about how awesome they are at timing the stock market, everything goes in cycles, etc.

My own 2 cents is that I agree with the Matt Levine theory: there are fewer sources of entertainment and lots of different Americans who previously had no exposure to the stock market who also just got checks from the government are just going nuts. I agree with most everything people above me said as - there aren't a lot of other options and even though everyone agrees this bubble won't last forever, there are rational arguments in favor of riding the wave wherever it takes you.
posted by Dmenet at 8:31 AM on January 18, 2021

My lay understanding: Both the Fed and government have added a huge amount of money to the economy this year. At the same time, a great deal of commerce and day to day economic activity slowed. As a result, those with money need to find places to put it. Options include real estate (active and up), art (not my field but I’ll guess prices going up), bonds (require government spending to create, atrophied), and stocks. So, money flows in and stocks are way up. Additional factors include the tax cuts of a couple years ago and corporate buybacks. Again, money added to the system without otherwise changing fundamentals.
As to whether it is a bubble, anyone who knows should put all their money on the right hedges. I think there will be an extended period of increasing underlying fundamentals even as money supply slowly tightens.
posted by meinvt at 8:49 AM on January 18, 2021 [1 favorite]

We aren't in the middle of the depression.

Unemployment is 6.7%, less than half of the rate of the peak shutdown. That's not a good at all, but it's lower than where it was for almost five years between 2008 and 2014, and well below peak unemployment levels for all prior recessions for the past 40 or so years.

In terms of aggregate demand, the unemployment is far less severe than 6.7% implies, because the loss of employment (a) has most impacted low-wage workers who contribute the least demand to the economy and (b) has been offset by (i) enhanced unemployment benefits, eviction moratoria and other forms of demand-supportive policy relief directly targeting those who have lost work and (ii) massively unprecedented business and consumer stimulus which provides a huge amount of direct demand and which supports consumer demand as well.

Result: unless you sell something that is directly impacted negatively by Covid (travel, downtown office space, movie tickets, etc.) things really aren't worse for you, and for every sector negative affected by Covid there's been a sector positively affected by it either in absolute terms or in stimulus-adjusted terms. And for most negatively affected Covid sectors, the market at least for the moment seems to believe that the present low demand is just sales volume being lent to future quarters. (A though exercise: all in between shut-down and ramp-up, Hollywood lost about six months of SciFi and comic book tentpole production but looks to be giving up at least 16 months of releases ... which probably means that for a year people will be seeing twice as many movies as they used to see.)

And as noted above, extraordinarily low interest rates have starved investors of places to go other than equities so there has been a significant compression of valuation in equity- you pay more (in stock price) for the same of future earnings power.
posted by MattD at 8:57 AM on January 18, 2021 [17 favorites]

Part of the answer is that we were in a bull market pre-pandemic and only some of those conditions have changed as a result. The pandemic was worse for some industries and sectors and people than others like MattD mentioned. Since the pandemic mostly spared white collar workers in remote-work friendly jobs, now those people are not only fine but have record amounts of savings. If they sat on this money in bank accounts stocks would be lower, but investors are well aware of the kind of market returns we were experiencing in 2019 and want somewhere to generate a return and therefore they are driving up equities prices through the roof, which may or may not be a bubble depending on who you ask. This also largely explains why housing prices are bonkers; for some people the pandemic has only driven them to more investing because they have more cash on hand than ever (NYT paywall https://www.nytimes.com/2021/01/01/upshot/why-markets-boomed-2020.html)
posted by slow graffiti at 9:15 AM on January 18, 2021 [1 favorite]

Unemployed people has fallen a great deal, but that count disregards people who have stopped looking.

Change in jobs is still well above 2008 levels
posted by Dashy at 9:49 AM on January 18, 2021

Also the biggest companies are represented by the stock market, and many of them are doing very well as consumers turn to on-line sales. See Walmart and Amazon. Your struggling local shops and shuttered independent restaurants are not represented on the NYSE or NASDAQ. It's kind of a parallel universe.
posted by citygirl at 9:57 AM on January 18, 2021 [4 favorites]

Yes, others have covered this very well, but chiming in here to underscore that some companies are doing just fine, as weird as that is. For example, look at this chart of quick service (fast food) restaurant revenue. There was no revenue growth between 2008 and 2009, during the financial crisis. By contrast, there was ~$5B in growth in 2020 over 2019, which was basically the same growth between 2018 and 2019, without a COVID impact.
posted by Mid at 10:15 AM on January 18, 2021

i don't understand any of this shit, but low interest rates strike me as a main reason why stocks are the only way for money to make money these days. i remember pre 2008 having "money market" type accounts that had outrageous interest rates of ~10%. ergo, the financial crisis. now you're lucky to get 0.5%.

but i also agree the stock market is increasingly detached from both the "economy" and reality in general. not that i ever really thought it represented much more than a form of gambling.
posted by iboxifoo at 11:35 AM on January 18, 2021 [2 favorites]

Think back to early 2020. Everyone was home on lockdown, the government just handed you a large sum of stimulus money, and if you had free time and weren't really behind on your bills what did you do?

Well, lots of people daytraded on the new wave of trading apps like Robinhood, which let new users jump right into options trading. Here's a rabbit hole article that speculates that the surge of options trading on hot stocks like Tesla, possibly helped by huge funds that pumped cash into the options market (to cover their exposure on calls), which created a positive feedback loop (a "gamma melt-up", if you will) that spread across the whole market.
posted by JoeZydeco at 11:44 AM on January 18, 2021

People have to put their money somewhere. With interest rates close to zero, money market accounts and bonds don't get you any return at all. Hence stocks.
posted by Winnie the Proust at 11:57 AM on January 18, 2021 [1 favorite]

Let me expand on Winnie the Proust's post. There is a market for money, as there is a market for anything of value, like hog futures, corn futures, et al. When the bond market return is kept artificially low by the government as it has been for many years, investing in bonds is not as attractive as other investments. The other investments -- for most folks, stocks -- get bid up because there is more money chasing the little changed volume of stock instruments.

Add that most western governments are increasing the money supply, there is more money going around to find a place to invest. Again, driving prices up.

Although it is generally maintained that investors buy stocks for the future performance of the company in expected growth and income, in a time like this, there is little else to do with wealth. Even though the future expectations of many companies, compared to their stock prices (in simple terms, the P/E ratio, price divided by earnings) is fantastic. Average P/E ratios for S&P 500 companies has been rising continuously since the 2009 recession. Currently the average P/E ratio for this group of stocks is 38, i. e. new investors are paying 38 times annual earnings to buy stock in an average company in a pretty sound basket of companies.

Of course, there are other investments in which money could be put: entrepreneurship, real estate, gold and other precious things, but these things are not as liquid, as convenient, as stocks and bonds.

With the inflation rates so low, one would think folks would keep more money on the sidelines, as cash. When a more rational market emerges, these folks would have money to invest, not having lost money in the correction. But, as poster rd45 put it succinctly, the stock market is in a bubble or near bubble. Folks buy stocks hoping the bubble will continue to inflate. They don't want to miss out on all this bubbling. It's sad but some fool will be the last to buy into the bubble just before it crashes.
posted by tmdonahue at 5:24 AM on January 19, 2021 [2 favorites]

I’ve forgotten where I read a description of the stock market as representing “the mood of rich people” rather than the strength of the economy, but since I did it’s all made a lot more sense,
posted by fabius at 5:37 AM on January 19, 2021

Those of you suggesting that stimulus checks are responsible for the strength of the stock market do not seem to understand just how much money we're talking about in the stock market. Even if every single American (not true) got the full $1200 payment (also not true), the total amount invested would be $396,000,000,000. For comparison, the market cap of the Home Depot, which is just one company in the middle of the DJIA, is $360,238,442,549. The market cap of the NYSE as a whole in 2018 was $28,528,761,000,000. The $396 billion stimulus (which, again, is unrealistically high to prove a point) is only a little over 1% of that. You are vastly overestimating the power of individual investors. The market moves because of what infathomably rich people (and organizations) do, not because you bought a few shares of some stock.
posted by kevinbelt at 7:27 AM on January 19, 2021 [1 favorite]

I don't think anyone is suggesting that the market has done well because stimulus check recipients are buying a few shares with them. The stimulus checks have been the tip of the iceberg of vast fiscal and monetary support for the economy and markets.

That said, the support for individual consumption that included stimulus checks, enhanced unemployment, eviction and repossession moratoria and (semi) voluntary forbearance, PPP loans and the large payroll support that has gone into certain industries has been VERY important in sustaining consumer demand at non-recessionary levels.
posted by MattD at 10:23 AM on January 19, 2021 [2 favorites]

This article gives a great explanation. TLDR: Between the way stimulus was applied and the disparate effects of unemployment on different types of workers, many people ended up with plenty of income and nothing to spend it on. They took the money they would have spent on themselves and put it into the stock market, driving up prices.

NYT: Why Markets Boomed in a Year of Human Misery
posted by soy_renfield at 12:38 PM on January 19, 2021 [1 favorite]

Response by poster: Wow - thank you all for these great answers! I am always impressed with the MeFi community. The answers come so quickly and are perfectly articulate. Thanks!
posted by yet.another.boston.question at 3:37 PM on January 20, 2021