This recession has repressed consumption among the investor class far more than ordinary recessions, thus, they have more money available to bid up the price of assets. But will this last forever? It’s unlikely. The personal savings rate peaked at 32.2 in April, but declined in May to 23.2. Though the lockdowns are likely to be re-tightened, consumption opportunities will still gradually return, as people think up new ways to consume and show off. 100$ shifted from investments will rebound into corporate profits, but it will not have the same effect as before, as corporations will have to absorb some of the costs of adaption to corona.
The EMH would tell you that the market should have figured this out by now. It would have also told you that it should have been bothered by the world’s largest economy shutting down, but apparently not. What’s undeniable is that when you compare the projected GDP growth rate to the stock market loss, the latter is unprecedentedly small. What are some explanations:
- Investors have, for some reason, suddenly started to behave rationally, following the advice of economists and not selling their stocks during recessions or trying to time the market.
- The fed has figured out how to prevent stock markets from falling during recessions.
- The real value of the stock market has declined, the lack of a fall in nominal value is due to higher inflation expectations.
- Stock prices, like everything, are a function of supply and demand, demand is elevated based on the high savings rate, but this is temporary. (As I think anyone should agree, the pandemic won’t go on forever.)
1. is contradicted by a record level of day trading. I see no prior reason to assume 2., the fed has always attempted to do this, why would it only have figured out how to do so now? And, as this is a global pattern, our explanation should be biased to global theories. Did everyone figure out how to do this?
The most likely explanations are 3. and 4. Right now I’m in bonds, and if the EMH is right and I lose the next three to six months of the expected equity premium, well, that’s a loss I’m willing to risk for the chance to buy after a much larger crash.