As we write this piece, U.S. coronavirus cases keep hitting new daily highs, even as popular U.S. stock market indexes have closed many of these same days higher. Most indices are substantially higher than their late-March lows. How is this so? Is there a disconnect between the stock market and the case count?
There is no disconnect. Safe to say, almost all investors are well aware that COVID-19 cases are increasing and have already factored the news into their trades. Perhaps factoring in the $2.5 trillion the Federal Government pumped into our economy they believe COVID-19 will only temporarily dampen growth. Or maybe they believe it could boost stock prices for companies like teleconference providers or drug manufacturers.
When an investor buys a stock, they hope the business will expand while they are a shareholder. If so, they can expect to sell their shares for a higher price in the future.
But what is “the future”? Short-term traders are worried about the here and now. If immediate prospects look grim, they bail, driving prices down. But for now, longer-term investors seem happy to buy the same stock at what they perceive is a discount. They reason, even if COVID-19 temporarily hurts the company, its long-term prospects may be fine.
This explains why current economics haven’t significantly hurt stock prices. The market is future-looking.
If, however, investors determine COVID-19 is going to impact companies’ long-term prospects, we can expect an increasing COVID-19 case count to drive overall stock prices down.
In summary, the key is whether most investors perceive the effect of COVID-19 on a company to be temporary or permanent. Even then, a company permanently damaged by coronavirus may still see its recent stock price rise. For example, even if investors believe we will never fly the way we used to, some will still be willing to buy an airline stock that has fallen 70% in price. Even if it may take years to regain profitability, if the price is right, a frustrated seller can find a risk-tolerant buyer willing to take the deal.
That’s a quick take on the complexities of stock pricing. And why the stock market can increase even in the face of temporary bad news.
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