Why the stock market is going up… and it’s not because the Coronavirus is going away

by FiscalFrontier

I think I know why the stock market is up… and it’s not because the Coronavirus is going away.

It requires some macroeconomic and finance knowledge, but maybe, just maybe:

  • Fed actions (buying assets) are lowering risk premiums
  • Fed actions (lowering rates) are lowering asset yields overall
  • Both of these actions lower stock yields, which increases stock prices
  • Lower stock yields = longer duration for stocks (dividend discount model)
  • Longer duration + lower stock yields = less overall sensitivity to the lower expected earnings for next 12-24 months due to Coronavirus
  • Plus… a maybe…. maybe long-term inflation expectations due to printing money = higher earnings (in pure dollar terms) for cash flows 5-30 years from now

Run those things through a discounted cash-flow model, and you get higher stock prices. Near-term earnings become less important to the overall picture.

The absolute weirdness of finance.

Spreadsheet that helps explain it: docs.google.com/spreadsheets/d/1tdem96CqM4leh7eJU5U7ZVOsGmkouB4Mcx0MsfbQa8M/edit?usp=sharing

Picture of the spreadsheet: Imgur Link

EDIT #1: Even if you set S&P 500 earnings to $0 for the next 3 years (Coronavirus kills the economy), the decreased yield due to Fed actions still lifts S&P 500 by +8% from today’s levels. ^ Look at the spreadsheet ^

 

Disclaimer: This information is only for educational purposes. Do not make any investment decisions based on the information in this article. Do you own due diligence.