16 million US citizens filed for unemployment across a few weeks during the COVID-19 crisis (that’s roughly 10% of their entire workforce) yet the stock market was at an all time high. In fact, in just 4 days, markets saw the largest increase since 1974.
Stock market performance is never a reflection of the wealth of the average person.
Why is it when the stock market is raging hot during a bull market, you’re not getting astronomically richer yet during a downturn – everyone seems to be losing their jobs?
One reason why the average person doesn’t get rich when the market is hot, is because they aren’t paid in company stock & compensation is usually independent of the profit a company makes.
Company does okay? you earn X
Company does well? you earn X
Company does badly? You earn 0.5X
You are more likely to get a pay cut when a company does badly than you are to get a pay raise when a company does well.
Another reason is the disconnect in the stock market to the “real” economy. This is reflected in the disconnect in current valuation multiples. Simply put, people pay faaaar more for a piece of a company than the company may ever make. Tesla has only recently turned a profit… but it’s worth $105bn.
Investors believe at some point, Tesla will be worth something. They’re betting on the future earnings growth profile of the company. A week ago, Tesla was $470… it’s now $573. In ZAR terms in 5 days you could have made R1,800.
… but it’s still loss making
You have a faint idea of when it will turn a profit but until then, you’re playing in a casino. You run a few excel calculations, read some broker notes, call up some investment banking friends but you’re still guessing. You own a piece of a company that has negative earnings.
Here’s the fun part, what if you don’t actually care whether it will make a profit. What if you just buy at $573 and sell at $873? I mean, at one point it was at $900.
Congrats! You’re officially part of the bubble club. Once enough people think this way?
Now you don’t care whether this company is profitable. The investor textbook is out the window. You just want to find an idiot who will buy the stock from you. Remember the guys who bought Bitcoin at $19k? (It’s barely $7k now). You’re become a speculator, not an investor.
Irrational behaviour, speculation, asymmetric information, a lack of liquidity, unfounded optimism all lead to the market being inefficient.
The stock market never accurately reflects the man on the street.