Your Thoughts on the Market?

I'm interested in hearing everyone's thoughts on the market... is it just me or do the numbers not add up? It seems as if debt monetization has had little effect on the market and I cant seem to understand how equities have not corrected themselves. Not to mention that their is a very large divergence between the Dow & Nasdaq, which historically has occurred prior to a crash. Both the Stock Market & Real estate have been "Booming" homebuyers are willing to spend 30-40k above asking... is that not a housing bubble? So what happens when interest rates rise next year and suddenly that house is not worth as much? Moreover, commodities are increasing in price and economists assuming "great demand" following the pandemic, but is it not more likely that demand will not meet the rate of inflation? All of these are concerns that have been seen in the past, but I find this year to be different. The amount of retail investors that have created brokerage accounts during the pandemic is around 10 million, with every social media platform talking about investing, robinhood & crypto currency. Is this not like the story of JFK's father and the shoeshine boy where he mentions that he knew to exit the market when the shoeshine boy was giving stock advice... Should another crash occur, what can the fed do? interest rates are already zero... I could be pessimistic, or possibly not understand enough about how the market works- im still a senior in college. Nonetheless, I'd love to hear the thoughts of working professionals.

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Comments (9)

Apr 20, 2021 - 4:27am

You bring up some interesting points and while I don't know the answers to them, I have a few thoughts on them. I'm not claiming to be correct but just my opinion.

Almost everything in there can be explained by rock bottom interest rates. Low rates reduce your weighted average cost of capital (WACC) and therefore increase the present value of future cash flows (simply DCF model). This certainly applies to stocks but also any asset. Low rates means people can borrow cheaply and cheap debt allows one to buy more expensive housing - explaining your booming homebuyers situation. 

Crypto/robinhood and 10m retail brokerage accounts in the pandemic - this sounds like a lot, but the spending power of those 10m accounts is probably still insignificant in comparison to the spending power of institutional funds. Big/dangerous share price moves are a function of liquidity. Large cap stocks = more liquid and therefore more difficult to move the dial. Lets take Apple - who have 17bn shares outstanding. If each of those 10m retail accounts bought 1 share, that's insignificant, 10m shares relative to the 17bn. Comparing that to Gamestop which as 70m shares outstanding, even every one of those retail traders bought a share all of a sudden you have a big chunk of the free float being bought into. When money is cheap, people's risk appetite grows and this is all we're seeing.

I'm not sure I understand your question on inflation but how I see it is, demand is going to boom because people have effectively spent  the last 12 months being bored at home and if they're still employed, saving a lot of money. Pent up demand will be released causing too much money, chasing supply which isn't there. This gives rise to commodity price increases. Inflation imo is the biggest risk to equity markets at the moment as unsustainably high inflation, is quelled by the Fed raising rates. Raising rates, as mentioned earlier, will have the opposite effect of what we've had for the last 10 years. Low rates = higher present value of future cash flows and high/higher rates is the opposite. 

Just my 2 cents and by no means 'correct'. I would recommend reading memos from Howard Marks which are available for free online. He has a very balanced view on things and I always find them useful.

Array
Apr 20, 2021 - 8:28pm

I can see your perspective in relation to the buying of homes, if you were to view the difference paid in interest from 3.9% to a  low of 2.72% the amount surpasses the additional amount. Moreover, with respect to investing, I can also see where you are coming from, but that is on the assumption that these new investors are strictly buying stock. However, I am more concerned with the derivatives perspective. Will these new investors survive the margin call required if equity prices fall? Again, many assumptions I am making here, but I'm just trying to gauge what possible results can be. I can see demand increasing for that reason, but that doesn't mean individuals will have the ability to capture that demand. Many people are still unemployed and many small businesses have closed. Nonetheless, your depiction is more likely the reality. I really appreciate your response, It was hard for me to see the latter when professors cannot answer your questions haha.

Apr 20, 2021 - 5:07am

The bull run the last 4-5 weeks has been wild. I bought a few April23 413 puts yesterday expecting a bit of a pull back short term, but I might not have paid for enough time.

Don't underestimate the firm grasp the bulls have right now. Who knows when the correction will be, and how big it even will be before the next leg up.

Pretty sure UBS just set a 500 price target for it. But I mean comon, it's been green for how long now? 4 weeks straight minus today? Definitely due for a healthy correction, but what do I know.

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Apr 21, 2021 - 3:39am

A correction is simply the stock market falling by 10-20% from its recent high, definitions vary but the premise is the same. The Fed doesn't really care about what happens to the stock market as its only goal is to keep employment high and inflation under control. So in a correction, Fed is unlikely to do much unless it influences its 2 objectives 1) maximum employment and 2) inflation at 2% ish.

If you're asking what happens if we go into another recession and what can the Fed do in that circumstance? Well monetary policy comes in 2 forms 1) lowering rates which as you correctly point out, can't go much further as they're already low. They could go into negative interest rate territory which means you are effectively being paid to borrow money but I think consensus is the Fed is unlikely to do this. The other form is 2) bond buying. The Fed buys bonds from banks. Think of it like this, the banks receive cash and give the fed a bond in return. The banks have more cash than they did before and therefore are more willing to lend at attractive rates. Historically, the Fed has bought high quality bonds from the banks to stimulate demand. The Fed could expand its bond buying plan by buying worse quality bonds from banks to give them even more money to lend.

The other thing government can do, is to cut taxes to boost business spending, which should stimulate employment and ultimately spending. This is however, not in the power of the Fed. Biden is in fact planning tax hikes atm. 

Again, not claiming to be correct, just my 2 cents. Hope it makes sense. 

Array
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