Question

(Valuation of stocks and bonds). If you look back at the value of stocks pre-pandemic, and compare them to now, many stocks have fully recovered their losses or even have exceeded prices before the pandemic hit. Yet we still have over 25 million out of work and GDP for the year is expected to shrink almost 6%. How can one justify these stock values?

Answer 1

Stock prices are highly futuristic in nature and sometime they are irrational too. The main concern when the price is crashed wasrelated to the impact of the coronavirus on the overall global economy and there was a fear that the it will kill a large number of population and businesses but it did not implicate that damage as it was predicted, so market is highly futuristic in nature and it is discounting that sooner or later there will be a vaccine which will be trying to eliminate all the effect of this virus and it would mean that the life would be back to normal so market is trying to discount all the possibilities of a reduction of impact of the virus and Federal Reserve has also provided the stimulus in the form of zero interest rate and quantitative easing along with the bailout package so market is also trying to discount that Central Bank of the country is with their side in order to counter this virus so they are trying to discount all the futuristic earning of various leaders in the market and the market has gained.

Stock prices are driven by the emotions and futuristic predictions so there is low efficiency in such markets because there is a high euphoria of buying at irrational prices but this can settle down once the situation stabilizes, as this price to earning ratios are not sustainable and market will be eventually settling in for synchronisation with the intrinsic value of the companies.