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In Reply to: The market isn't rational posted by Jay Buridan on May 26, 2020 at 12:38:13:
When the net flow of money is going into the market rather than out, prices go up.
Just think of where the money is coming from:
- The vast majority of white collar workers with 401Ks and IRAs are still employed and making contributions
- Large institutional investors like government pension funds haven't seen their budgets cut yet (but that will be coming)
- Some very large companies are still flush with cash and using it for stock buybacks
- Unprecedented Fed stimulus
And why there isn't more flowing out:
- Bonds are looking riskier all the time
- Real estate is slow. There's no demand for sub-prime mortgages, and commercial real estate development has slowed way down due to the pandemic
- Most of the big companies who make up the indices were in good financial shape prior to the pandemic, and companies in some of the hardest hit sectors (e.g. aviation) are getting bailouts. So far it looks like they will come out wounded but OK.
- Individual investors have been taught not to change their investment strategy based on market swings
- As always, investors are trying to ride the upswing
Having said all that, everybody knows the market is overvalued. Despite the crash in March, the market cap is back up to dot com boom levels. So if we don't have another crash, we're likely to have a volatile market for quite some time with a lot of swings for traders to play off of, but the long sustained bull market is probably over.
Also, I don't think the market has priced in the impact of reductions in economic activity associated with subsequent wave(s) of Covid-19. I think there's some wishful thinking that the economy is just going to get better from here. But if we take our foot off the neck of this virus, or if there's a significant mutation that we don't notice until it's too late, then for sure there will be another panic and correction.
Late last year, I minimized my contributions to stock-based funds and started accumulating cash savings. I thought about throwing some money back in after the March sell-off, but didn't do it. So I missed the current rally. Oh well. There's no way I'm going to start putting money in again now, not with the way this re-opening is going.
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Follow Ups
- Whether it's rational or not, it's responding predicatbly - Dave_K 05/27/2008:37:10 05/27/20 (0)
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