The stock market is off the rails

The stock market is off the rails
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To investors, it makes sense. Stocks have surged more than 40% since late March because the worst damage from the coronavirus recession is in the past and the cavalry has arrived. The Federal Reserve is now propping up risky assets, Congress is flooding the economy with money and some of the millions of lost jobs seem to be returning.

But if you’re an ordinary person who thinks the soaring stock market is crazy, you’re right. There’s no right or wrong value for any stock, or for the market as a whole. There’s only the value the market assigns at any point in time, based on supply, demand and other factors. But demand for stocks—investors placing buy orders—is out of sync with what’s happening in the real economy, where the unemployment rate has soared from 3.5% to 13.3% in just three months.

Traders are right when they say the stock market evaluates the future, not the past. Backward-looking economic data about what happened last week or last month is irrelevant to the value of stocks unless it hints at future actions, such as an unexpected change in Federal Reserve policy. But it’s hard to imagine what future stocks are evaluating right now. 2025? 2030?  If so, that’s a time horizon so distant it’s almost meaningless.

Here are some of the grim developments economists foresee during the next 12 to 24 months:

Massive small business failures. “Very small businesses with just a few em­ployees are expected to fail en masse,” Moody’s Analytics says in a June 2 forecast. “Of the 8 million busi­ness establishments operating prior to the crisis in the U.S., it would not be surprising if close to a million do not make it. New busi­nesses will eventually form, and the economy will recover, but that process will take years, not months.” Many of those small firms don’t have the connection with banks needed to take advantage of federal aid. Commercial bankruptcy filings in May soared by 48% year over year, a preview of the carnage coming.

Trillions in lost output. The Congressional Budget Office estimates the coronavirus recession will cost the U.S. economy $15.7 trillion in real economic output by 2030, adjusted for inflation, for a 5.3% drop in total output. That’s 7 months’ worth of economic activity that simply won’t happen, which will suppress employment and incomes well into the decade.

Source: Yahoo! Finance

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