Here's Why The Stock Market Is At An All-Time High

Summary

Highlights

• 2020 saw the S&P 500 reach record levels despite global crises. 🚀
• Market highs are driven by stimulus and tech stocks' surprising resilience. 📊
• Investors might be chasing returns in a 'market bubble.' 🌀
• Understanding market highs requires dissecting investor behavior and expectations. 🤔
• Stimulus money is not just for essentials but boosts stock prices hugely. 💹
• There's a huge gap between real economy status and stock market performance. 🌍

Key Takeaways

• The stock market hit all-time highs in 2020, defying economic gloom. 📈
• There's a profound disconnect between market performance and the real economy. 🔍
• Tech giants like FAANG stocks dominate market movements. 💪
• Investors often confuse stock market health with economic health. ⚠️
• Massive fiscal stimulus and low interest rates drive market prices up. 💸
• The stock market is more like a high-stakes game than an economic indicator. 🎲

Overview

Chapters

• 00:00 - 00:30: Introduction and Overview The chapter provides an overview of the unexpected performance of the S&P 500 in 2020, despite global chaos and a relentless news cycle filled with negative headlines. It highlights the contrast between the perception of an apocalyptic scenario and the financial performance of major companies in the USA. The resilience or obliviousness of the stock market amidst such turbulent times is a key focus.
• 00:30 - 01:30: Current Market Situation The chapter 'Current Market Situation' delves into the impact of recent global events, including the coronavirus pandemic, on stock markets and companies. Despite negative occurrences such as unprecedented GDP figures in the USA, there appears to be a counterintuitive response from the stock market, which rises amid the turmoil. This observation suggests an unexpected investor sentiment where disastrous news does not deter market optimism and is instead perceived as a potential buying opportunity.
• 01:30 - 02:00: The Puzzle of Market Behavior The chapter titled 'The Puzzle of Market Behavior' delves into the seemingly irrational rally in the markets amid ongoing global events. Despite predictions and market research suggesting that the financial upheaval might extend till 2022, a surprising market recovery occurred. The chapter revisits previous discussions on the channel about market behavior, emphasizing that currently, there might be no better place to invest money. This piece serves as a continuation of prior analyses, exploring the reasons behind unexpected market surges and the potential logic underpinning these financial phenomena.
• 02:00 - 03:00: Role of Stock Market Investors This chapter delves into the role of stock market investors within the broader economic system. It questions whether the stock market truly reflects the state of the economy or if it serves an entirely different purpose. Key points suggest that despite criticisms, the perceived flaws in the stock market might actually be functioning as intended. Readers are encouraged to contemplate whether the stock market's performance is an indicator of economic health or if it possibly signals that economic conditions aren't as dire as often portrayed.
• 03:00 - 04:30: Sponsor Message: Trends This chapter discusses the recent market rally, noting a 50 percent increase in four months, and questions whether this indicates a new market bubble. It also includes a sponsor message from Trends, described as a valuable and undiscovered knowledge hub associated with The Hustle, a well-regarded tech and business newsletter.
• 04:30 - 05:30: Market Efficiency and Psychology The chapter discusses the benefits of a subscription to Trends, highlighting the community of industry thought leaders it offers access to. It emphasizes the ease of networking with over 5000 entrepreneurs, investors, and startup CEOs. The chapter concludes by mentioning the presence of an extensive content library available through Trends.
• 05:30 - 08:00: Investor Roles and IPOs The chapter discussions the common belief in market efficiency, which posits that markets accurately reflect the true value of assets. However, it challenges this notion by highlighting human irrationality and the influence of psychological factors on investment decisions.
• 08:00 - 10:30: Stock Market and Society This chapter explores the integral role of investors within the stock market and the larger society. Despite the increasing role of technology and machines on Wall Street, the human element remains central. The chapter begins by questioning the fundamental role of an investor, highlighting that, at its core, an investor provides money or capital to help launch or improve a promising business venture.
• 10:30 - 13:30: Reasons for Market Highs The chapter discusses how strategic investments can lead to significant economic benefits. An example is given where a $200,000 investment into a farm results in acquiring new equipment and land, thereby tripling output. This not only increases the farmer's income by 50%, but also provides a good return for the investor and benefits the wider economy, including manufacturers like John Deere.
• 13:30 - 16:00: Impact of Major Tech Companies The chapter titled 'Impact of Major Tech Companies' discusses the misconception that purchasing shares directly benefits the company. It notes that buying shares, such as those of Apple, does not provide the company with additional capital for research and development or infrastructure expansion. Instead, the money simply transfers from the buyer to the previous shareholder, illustrating the separation between shareholder transactions and company funding.
• 16:00 - 17:30: The Nature of Investment and Conclusion The chapter discusses the nature of investment, highlighting that companies seldom raise money from selling shares after their initial public offering (IPO). It notes that the trading volumes of shares part of an IPO constitute a minimal fraction of total trading volume on major exchanges like NYSE and NASDAQ. Once listed, companies rarely have opportunities to raise further funds from investors, making the IPO a crucial, often singular, fundraising event. The chapter concludes on the nature of investment, emphasizing the significance of the IPO in a company's financial strategy.

Here's Why The Stock Market Is At An All-Time High Transcription

• 00:00 - 00:30 so we are past the halfway point but the wild ride of 2020 is not letting up the news cycle is filled with horrifying headlines day in and day out an outside observer could be forgiven for thinking that we are genuinely living through the apocalypse but amongst all of this in complete defiance or perhaps complete ignorance to the goings-on of the world the s p 500 an index that measures the stock performance of the largest companies in the usa closed out this week at its highest
• 00:30 - 01:00 level ever this is a collection of stocks and companies that have been impacted by the fallout of the coronavirus as well as all of the other nasty stuff that's going on in the world right now so what is going on here people could be forgiven for thinking at this point that an extinction-level media strike would qualify as a strong buying sign and you know what they may not be wrong the usa releases its worst gdp figures in history the stock market rose the next day
• 01:00 - 01:30 research is released that this whole ordeal may not be over until 2022 1 rally in the markets to a rational viewer this is verging on insanity but is there method to this madness a quick note is that of course we have actually explored this issue on the channel but since that video a full recovery has taken place a big takeaway of that video is that there might not be any better place to keep money at the moment and we will actually expand on that point here so call this a part two if you will but
• 01:30 - 02:00 this entire issue definitely deserves further exploration and there are a few key points that have surfaced since then to give some remarkable insights into how this broken system might have been right all along to determine this we need to decide on a few things what is the actual role of stock market investors does the stock market have any relationship to the economy is this potentially a sign that things are not as bad as we are led to believe
• 02:00 - 02:30 and since the market has now rallied 50 percent in four months is it fair to say that we are right back in another market bubble this episode of economics explained was made possible by our sponsor trends which is in my opinion one of the most valuable and undiscovered knowledge hubs on the face of the internet trends is part of the hustle which if you guys are not already subscribed to he's hands down one of the best daily email newsletters for everything tech and business when trends reached out to the channel to see if we'd be interested
• 02:30 - 03:00 in having them on as a sponsor i genuinely got really excited because one thing i get asked a lot on patreon is advice on starting a business and how to network with smart people which is exactly what trends is all about with a subscription to trends you have exclusive and private access to a community of industry thought leaders in virtually every field even better trends makes it super easy to digitally network with over 5000 entrepreneurs investors and startup ceos it's truly a community at heart and i can't say enough good things about it i'd also be remiss if i didn't mention that trends also has an incredible content library
• 03:00 - 03:30 if you guys like watching these videos you are going to love reading exclusive articles that are only available to subscribers of trends just like the ones that you see on screen thanks to this sponsorship you can get a two week trial for just one dollar by going to trends dot co slash ee the link is on the screen now and in the video description below it is often taught that markets are efficient that since something is only worth what someone is willing to pay for it prices are gospel but humans are dumb
• 03:30 - 04:00 and the machines haven't completely overtaken wall street just yet so maybe the best way to understand this market craziness is to understand the crazy people that make it possible so at its core what is the role of an investor this might sound like a simple question with an easy answer an investor is someone who puts money or capital towards a promising idea or business venture to get it off the ground or to make it more efficient an investor
• 04:00 - 04:30 might invest two hundred thousand dollars into a farm for a fifty percent stake in the business the farm can then use that money to go and buy a combine harvester and an extra few acres of fields which will triple the output of the farm sure the profits now need to be split 50 50 but with three times the output everybody is better off the farmer increases his income by 50 percent the investor is getting a good return on his investment and even the wider economy is winning off this employees at the john deere factory
• 04:30 - 05:00 get to sell an extra piece of equipment that they wouldn't have otherwise been able to and of course there is more food for everyone to consume now this is of course very oversimplified and actually quite divorced from reality if today you go out and buy shares in apple that money is not going towards the company it won't be invested into research and development or building new factories instead it will just go to some other investor who used to own those apple
• 05:00 - 05:30 shares companies very rarely raise any money from selling shares after their initial public offering or ipo and the trading volumes of shares that are part of an ipo are a tiny tiny fraction of the total trading volume on exchanges like the nyse or the nasdaq in fact once a company lists its shares after its initial public offering that's kind of it for them it's really unlikely they are ever going to be able to raise money from investors ever again if they do need money to put towards
• 05:30 - 06:00 productive ventures then their options would be to take on debt in the form of a company loan or to turn a profit if that's something that companies still do these days what this means is that in principle the stock market amounts to people playing hot potato with securities that don't actually ever go towards anything useful right well actually sort of people with vast share portfolios shouldn't really be patting themselves on the back as the guiding force of modern industry but they are more so the holders of
• 06:00 - 06:30 contributions that have been now full disclosure i am saying this as a proud holder of these has been contributions to society but perhaps this isn't entirely fair the role of an investor into the stock market isn't completely useless it's just very let's call it abstract real genuine investment as we saw in our lovely little farm example takes place primarily as funding rounds into younger businesses well before
• 06:30 - 07:00 an initial public offering these will be called investment rounds where the owners of a company will sell off shares to qualified investors companies like wework are not yet publicly traded or listed anywhere and depend a lot on investment funding to make them possible these investments don't come from regular households but rather from large investment funds in this case softbank and a collection of venture capitalists now most modern venture capitalists are not at
• 07:00 - 07:30 all interested in sharing in the profits of a company but rather they want to buy in on the ground floor and then work on exiting the business an exit basically amounts to them selling off their shares that they got from a very early and therefore very risky investment into the company these exits are normally done after a company goes public so in reality an ipo actually serves two purposes the first is the standard capital raised
• 07:30 - 08:00 to make money to put towards the growing business yada yada yada but perhaps the more important component is that these gives these early investors a platform to sell their once volatile investments to regular investors with less of a risk tolerance these early investors will then get a nice big pool of cash so they can go out and do it all over again the role of a standard household investor into the stock market is not to fund a young business in need but rather it is to fund
• 08:00 - 08:30 the people that fund the young business in need or depending on how many times a particular share has been traded back and forth since its listing it might be to fund the person that funded the person that funded the person that funded the young business in need but you get the idea so this all actually begs the question why do people care about the stock market obviously investors want their investments to go up in value or at least return some nice fat dividends but outside of people with direct ownership does this even matter
• 08:30 - 09:00 if companies don't rely on shares to raise capital and the stock market is not directly contributing towards making a happier wealthier world then why does it dominate headlines for starters of course people conflate the economy with the stock market it might sound silly to you someone who would sit down to watch an economics video but remember most people don't know and or don't care at least until they see headlines with big alarming figures that make it sound like the world is coming to an end and of course a stock market crash can
• 09:00 - 09:30 be a sign of an economy in turmoil but it's not always the case the stock market and the economy are two different entities a strong economy will almost always lead to a healthy stock market but the opposite is not necessarily true a strong stock market doesn't necessarily mean a healthy economy as we can see right now so a company executive and especially a politician for that matter being overly focused on stock market performance
• 09:30 - 10:00 doesn't sound that logical right well no there is actually a very good reason for both to the corporate executive the stock price might not have much bearing on the company's actual financial performance but shareholders own the company that means that they can elect a new board of directors and replace ceos on a whim if they are not happy the best way to keep them happy keep that stock price high this sounds sensible enough but it is actually one of the big disadvantages of having a public company
• 10:00 - 10:30 since investors want strong returns and the investors control the board who in turn control the executives who run the whole business the whole operation can become ultra focused on stock price this is made even worse when c-suite level compensation is tied to stock options which it almost always is executives may elect to do something that is not necessarily in the best strategic interest of the company if it will bump the stock price up a bit like say taking on massive debt to do
• 10:30 - 11:00 sweeping stock buybacks these decisions give them a nice fat bonus and keeps most stockholders in a happy state of complacence now to politicians it's all about optics the media loves to scream and shout about a stock market crash in reality and in isolation these headlines won't impact most of the people reading them but if people see the dow didn't ow and connect that last time this happened they lost their job they may be very very angry at whoever is in charge
• 11:00 - 11:30 what this means is that while the stock market might not be that important for business managers politicians or regular folk investors have a way of making it relevant but this all sounds like it is skirting around the 27 trillion dollar question why is the market at an all-time high in the midst of armageddon now of course one of the big reasons that we mentioned in the last video is fiscal stimulus leading to inflation but that is worth exploring in more detail
• 11:30 - 12:00 of course the money printers have gone bro and this has introduced trillions of dollars into the economy some of this went to regular households to cover the cost of living for people that may be out of the job through no fault of their own but a good majority of this went to businesses and their wealthy owners one side effect of this has been a spike in lamborghini sales but for the more prudent millionaire they might put this money towards the stock market this has increased demand for shares and hey presto this has pushed up the price but this isn't the whole story the other
• 12:00 - 12:30 side to this is that when we are assessing the price of something be it a house or a roll of toilet paper or company stock we will look at the price of alternative goods if rent doubled overnight the price of houses would likely shoot up too because more people would be desperate to get out of rentals and into a property that they owned if the government gave a free b day to every household in the nation the price of toilet paper would fall and if interest rates were
• 12:30 - 13:00 lowered to zero percent on treasury bonds or large bank holdings then the stock market is the next best alternative howard marks a billionaire investor has noted that he and his company are just happy to accept a significantly lower price to earnings ratio in this crazy crazy world a price to earnings ratio basically notes how much an investment returns as a multiple of how much it costs so a price to earnings ratio of 16 would mean that the price of an asset is 16 times
• 13:00 - 13:30 what it returns per year which is coincidentally what investors normally expect out of a relatively safe investment like a s p 500 index nowadays that expectation is more like 24 times and it is only getting worse as investors continue to lower their expectations around their expected returns in the short term these lowered standard means that investors can bag some quick wins like a 50 rally in stock prices which
• 13:30 - 14:00 kind of sounds like a great success but think of it like this the stock market is a market like any other it has things that offer value to the buyers and those things trade for what people think is a fair price if the price of groceries went up by 50 in the space of three to four months that would be seen as an absolute disaster verging on hyperinflation and it's not necessarily different to the stock market the actual value of the market is lower
• 14:00 - 14:30 than it was this time last year it is a rotten banana it's just that people are starving and they will pay whatever it takes to get something to chew on so with what could amount to a multi-trillion dollar market failure is this a bubble the last consideration in the trillion dollar bubble dilemma is where this recovery has come from the so-called fang companies that is facebook apple amazon netflix microsoft and google
• 14:30 - 15:00 all have very sore backs at the moment that's because they have been carrying the entire market these companies are collectively worth over five trillion dollars which is 25 of the capital valuation of the s p 500 to give you an idea of their weighted influence amazon and apple alone have a larger market capitalization than every publicly listed company in australia combined and australia is not a small
• 15:00 - 15:30 economy what this means is that these companies dictate the market every other industry be it oil pharmaceuticals retail minerals the automotive industry hospitality they are all suffering as you would expect it's just that the success of the massive tech industry has made this stagnation completely invisible in the context of the broader market which leads to one big final scary consideration we have spent this entire video looking
• 15:30 - 16:00 at the s p 500 which is an index and index basically means a collection in this case it's a collection of the 505 biggest companies in the usa but indexes are actually really popular as investment classes where instead of buying one share or a group of shares people will invest into an index that has a pool of hundreds of shares this gives an average investor in-built diversification and exposure to
• 16:00 - 16:30 lots of companies without having to spend millions of dollars to buy all of these and weigh them individually this is great for easy investing but it means a lot of misguided capital is being issued directly towards these companies that are listed in these indexes these companies are already very very large and very established and potentially very overvalued dr michael bury yes that michael bury the one that predicted the 2008 subprime mortgage crisis has made similar predictions about
• 16:30 - 17:00 exchange traded funds just because you bundle something up call it diversified and then feed it into huge pools of capital does not necessarily mean that it's a good investment what is a good investment is in yourself and i can't think of a better place to start building out that portfolio than with trends trends is home to a wealth of exclusive articles that i know you were going to absolutely love like this guy that went from being three days away from insolvency to building a 400 million a year business what's also really neat
• 17:00 - 17:30 is that you can rsvp for exclusive q a live streams with famous startup ceos and so much more if you want to support economics explain and help make these videos possible while also getting a really great deal check out trends.co ee which will give you access to trends for two weeks for just one dollar the link is on the screen now and in the video description below as always thanks guys bye