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So I am reading and listening to the news, watching the numbers re Covid-19, listening to and reading apocalyptic accounts of the coming recession, hearing of record breaking unemployment reports and then doubling those numbers the next week...

And the stock market goes down 1-2% and then stages a bit of a rally at the end of the day... (April 3)

I get that there has been a 20+% drop already, but it just seems to me that this doesn't account for the seriousness of the situation moving forward.

I am new to the trading/investing world (I've always been a buy-and-holder until a month ago when I saw the writing on the wall and got out when the markets were down just a few percent). But I'm just trying to figure out why there isn't more market movement downwards. Can somebody help me understand?

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    @juhist - And yet news released yesterday was that "The C.I.A. has been warning the White House since at least early February that China has vastly understated its coronavirus infections and that its count could not be relied upon as the United States compiles predictive models to fight the virus, according to current and former intelligence officials." – Bob Baerker Apr 4 at 12:16
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    News today, or this week or month, affects short-term traders. Long-term investors think in terms of years and decades. – jamesqf Apr 4 at 18:31
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    People really need to stop quoting PRC propaganda as if it is even remotely accurate. It is not. It has never been. The media is doing a giant disservice when they pretend like the infected/death numbers officially released aren't grossly underplaying the situation. Just ignore the mountains of urns and the fact that funeral services are monitored and controlled by Party officials! – eps Apr 4 at 19:16
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    @BobBaerker Bob, you are exactly right. And, we don't know how long immunity lasts, what the specific role that ADE(antibody dependent enhancement) plays now in infection or could(will?) play in reinfection. Many people still aren't leaving their homes in China so I laugh when I see news that China is "emerging" from the pandemic. Even if they were, we couldn't trust the info. – RWP - Down by the Bay Apr 4 at 21:38
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    The market lost approximately 30% of its value. What are you talking about? – 123 Apr 5 at 17:45

13 Answers 13

90

Market reactions to information are not always timely, proportional, or rational.

We don't know the full impact of our current situation; we're feeling it out.

  • Some people (bulls), believe that the initial dip was an over-reaction, that the government response will prevent further decline, and/or that things will go back to normal pretty quickly, so they are buying the dip.

  • On the other side you have people (bears) that believe the initial reaction was just a start but not enough to price-in the full impact, that the government can't prop up the economy, and/or that this will drag on for a long while, so they are betting on further decline.

The problem with this idea of information being priced-in is that we all know there's a global pandemic, but there are very different opinions about how much that should affect the market.

Consider unemployment levels: We have projections about unemployment rate potentially hitting a peak over 30%. Meanwhile, the current unemployment rate is 4.4% and projected to hit double digits in April. The only way all of that information could be appropriately priced in is if everyone agreed about the reasonableness of the projections and had the economic prowess to understand the actual impact of those figures.

Instead, what happens is that some people will see the actual April unemployment numbers as surprising new information to react to, while others will see it as old information in line with their expectations. Add in thousands of other pieces of information about which people have conflicting opinions, and it becomes pretty much impossible to know in advance if that information was all priced in appropriately.

The most recent comparable event is the subprime mortgage crash. Many people thought bottom was hit around November 2008 and there was a brief counter-trend rally before actual bottom was hit around March 2009. We don't know at this time if the market has bottomed out yet or not; nor do we know how long recovery could take.

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    Your answer is much more balanced and useful than the currently accepted one. Thanks. – Eric Duminil Apr 5 at 2:45
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    The information is already "priced-in" to the market. It's just that it's not priced in by an individual investor (who is easily fallible). Instead, it's a weighted average of all the investors. However, no one can judge if it's "accurate" or not; there is no such formula. See "wisdom of the crowd". – ahaas Apr 9 at 20:50
58

The market reacts only to new information.

It is already known that the new coronavirus has resulted in a pandemic. It was known long before the current situation. Having infections in most countries, and knowing the growth is exponential is enough. Not all people understand the power of exponential growth and how quickly its rate increases. Yet, there are some people investing in the stock market who do understand exponential growth.

It already was known that countries have to resort to various restrictions because that's the way China got the epidemic under control. This was known even before the restrictions started.

If you didn't see what was coming, there were some intelligent people who did see. Some of these intelligent people invest in the stock market.

I repeat, the stock market reacts only to new information. The market DID drop like a stone when the new information arrived. Today, the information is no longer new. It is already in the stock prices.

Also, the stock market drop can be classified as irrational. See here for my analysis. The loss of few quarters' result does not matter at all in the long run except perhaps by few percent.

So, all I'm saying that today is an extremely good opportunity to invest to stocks!

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    The problem with this 'priced in' notion is that there still are many unknowns. We don't know if the initial drop was sufficient because we don't know how long it will take to get back to 'normal.' So, yes the market reacts to new information. It doesn't necessarily react rationally/proportionally because the true impact of that information is not easily quantified. – Hart CO Apr 4 at 14:59
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    If you're invested in the whole market, the overall drop in your expected future dividends probably doesn't justify a 25% drop in prices. But if you're invested in just one stock, you might be worried that a short term drop in revenue could make that one company bankrupt, reducing its stock price to near zero. And individually chosen investments still drive the price movements of the stocks that make up the market. – The Photon Apr 4 at 17:02
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    This isn't correct, relies on circular logic and seems more focused on "talking your book" than giving an objective answer. The market forecast was off by about 50% on each of the last two initial unemployment numbers i.e. off by a total of 5 million unemployed in the US, yet, there wasn't a meltdown on the new info. So the market doesn't only react to new info...sometimes it reacts, sometimes it doesn't. It is not a deterministically rational beast that gets bad news and goes down (and the reverse). Sometimes, it does the opposite of what you expect, sometimes it reacts weeks later. – WittyID Apr 4 at 19:42
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    "The loss of few quarters' result does not matter at all in the long run" - unless you happen to invest in a business which will go bankrupt and be replaced by a competitor (possibly a new one) which you did not invest in. – user253751 Apr 5 at 23:09
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    @user253751: Individual businesses go bankrupt all the time. Reducing the risk from this is one of the reasons many of us choose to invest in mutual funds rather than individual companies. – jamesqf Apr 6 at 16:43
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As before the crisis, or perhaps even more so, there are simply no risk-free, interest-yielding investments. As always, the stock market is not only driven by the anticipated profits of the companies but also by demand for stock, which is still large because there are few alternatives.

Since there is a large degree of biological, social, political and economic uncertainty the profit and value prognosis reflects a spectrum of conceivable outcomes multiplied with their weighted respective perceived likelihood. My main argument is that not all of the scenarios are equally well priced in, especially not the more extreme ones.

This is due to two main mechanisms, one irrational and one more or less rational.

  1. The possibility of truly catastrophic outcomes is typically underestimated in the stock market assessments (famously, black swans occur more frequently than thought). The current economic situation is entirely unprecedented, everybody is playing it by the ear, and I think people are mentally masking out some worst-case scenarios.

  2. But if you did assign a significant likelihood to the worst-case outcome you would have to stop investing right now, entirely. This decision would play out differently, depending on what happens:

    • In the likelier event that the pessimism was wrong you'd stand there like a moron with his pants down.

      If, instead, you went along with the mainstream nobody could afterwards blame you for being extraordinarily stupid, independent of the outcome, and especially not in the more likely scenarios. This is why many CEOs buy IBM computers even though they are clearly not the best value for money. This is why investments in stock continue.

    • If your pessimism was justified though, and things take a truly catastrophic turn (whole parts of the economy collapsing, government paralyzed between loss of revenue, failing key industries and masses of people in need of support, social fabric fraying), all bets are off anyway. Remember the 2008 crisis? The economic system itself was in danger for a few months, together with any investments made. For a few months nothing was safe, everything was possible. The worst-case scenarios for the current crisis are much worse. Consequently, no investment whatsoever would be safe, including government bonds.

I suppose these are the reasons why investors focus on mainstream prognoses. There is simply no clear benefit in pricing in extreme scenarios; you would need to find a nice bridge to camp under in any case.

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6

The majority of the public seems to be operating on the belief that the COVID-19 is "going away" soon and life will go back to normal. Why this notion is popular probably has a lot to do with political and media rhetoric in both China and the US. Early on, Trump maintained that the virus was a non-issue, creating an air of complacency with many Americans. Both the media and Trump seem to be consistently rotating a few distracting catch phrases about wearing masks or "flattening the curve" with target dates to "reopen" the economy.

The fact is, there is no official strategy for reopening the economy, and no one knows how the curve looks on the down slope in the US - it could be a long, gradual slope, meaning that the virus may linger for quite some time, especially because of the disorganized and staggered approach to lockdowns across the 50 states.

With new evidence surfacing in China that the virus has not actually been contained and may even be reemerging in areas, as well as experts predicting a new wave of the virus arriving in the fall season, most signs show that lockdown restrictions will have to carry on much further into 2020. Many experts are pointing out that, without an actual vaccine, which could take multiple years to manufacture and distribute (legally speaking, the best-case scenario is 12-18 months due to necessary animal and human trials), consumer confidence will not return and lockdowns will likely continue as governments struggle to fully eradicate the virus.

The St. Louis Federal Reserve Bank released projections estimating that 52.8 million Americans could be jobless by the end of Q2. Percentage-wise, this is drastically higher than the unemployment rate during the peak of the 1930's Great Depression. Roughly 50% of Americans live paycheck to paycheck. With...

a) this level of unemployment and reduced consumer confidence, combined with

b) multiple failing industries due to a prolonged economic shutdown forced by repeated/extended lockdowns along with

c) a federal government that employs a leadership style based on obfuscating accountability,

...the US may experience the ideal preconditions for economic collapse. For example, if at the same time, the restaurant, tourism, airline, and hotel industries all collapse, a ripple effect will likely occur causing their suppliers to default over the following months. In a matter of time, the global food supply chain may become threatened leading to civil unrest (which is common in these types of conditions - e.g. see the social unrest brewing in Italy now).

The market will reflect this outlook once the national rhetoric is updated to include the upcoming mixture of the above forecasted events - which is likely to be reported over the next 60 days along with corporate earnings calls and unemployment claims.

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  • Almost +1'd this, but the passage, "experts predicting a new strain of the virus arriving in the fall season" -- emphasis on the new strain part -- gave me pause. I'm skeptical. Is there any citation for that claim? – Daniel R. Collins Apr 6 at 4:02
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    Biologist here: Strain is somewhat tough to define, but we're not expecting a new strain* in fall. COVID-19 seems to mutate slowly, which is lucky, but we're also not sure if it will follow the dip in summer/peak in winter pattern that flu normally follows, partly because there's conflicting theories on why flu follows this pattern. *if we're applying strain in the same way as flu, would imply a fairly major mutation of the virus's surface protein coat. – lupe Apr 6 at 10:06
  • I think "going away soon" is really not what most people believe. (Excluding the supporters of a certain politician, of course :-() Rather, at some point most people will have gotten it, recovered, and (we hope!) acquired immunity. That's the point of "flattening the curve", to make sure the number of cases at any one time does not overwhelm the medical system. – jamesqf Apr 6 at 16:49
  • @jamesqf, I do believe that most people are behaving under the pretense that the virus will disappear soon, lockdown will be lifted, and life will resume back to normal and markets will bounce back as a result. The fact is, if the virus lingers, consumer confidence will not return, as one person could be the carrier in an office, concert, restaurant, etc. with no way of detecting it. Given the mortality rate, people view this as a deadly virus, and will not risk exposure until they feel it is truly eradicated. I've added some language to clarify this point. – user96764 Apr 6 at 19:32
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    @user96764: I admit I'm a pretty poor judge of what "most people" are thinking. But just as a matter of biology/epidemiology, the virus isn't going to go away. Either a vaccine is developed and (as with e.g. smallpox & polio) basically everyone gets immunized, or it plateaus, with a fairly constant level of new infections, much like the "childhood diseases" like mumps, measles, and so on that pretty much everyone used to get before vaccines. – jamesqf Apr 7 at 19:27
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Not a complete answer, but three things to add to what has been posted.

  1. Nobody knows.

The accepted answer suggests confidently that the market is currently correctly priced, but based on history, we should doubt that anyone can predict that. There could be a 30% drop this week, or not.

  1. Maybe the alternatives to being in the market are also dropping in value.

Market prices as a whole drop if people as a whole want to sell but don't want to buy. If investors can't think of anything better to do with cash right now, they might not be in a rush to sell.

  1. The US government and Fed have shown a willingness to go to great lengths to prop up the market.

It could be that despite dire warnings, investors expect successful, proportional responses that keep stock prices high.

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I'll provide another answer in addition to my first answer.

The stock market indices consists of large industrial public companies, not small services sector companies.

The hard situation applies mostly to small services sector companies: gyms, restaurants, photography companies, nightclubs, bars, barber shops, etc.

These small companies, which are having very hard time now, are not well represented in the stock market. They are usually privately owned.

In contrasts, I'll look at the largest investments in my stock portfolio.

  • The largest of my investments is a hydropower / nuclear power company. People still use electricity.
  • The second largest is a major car manufacturer. Yep, people are not buying new cars and servicing of old cars may be slightly delayed due to people driving less. So, car companies might be affected by the recession.
  • The third largest investment is a bank. We are not in a financial liquidity crisis yet. People still need a bank account, a credit card and a mortgage (people are not taking new mortgages at the existing rate, but then again banks are offering campaigns for reducing the paybacks of existing mortgages, so the total mortgage amount isn't going to decrease).
  • The fourth largest investment is a major electric car manufacturer. The same I said about the other car manufacturer applies to this as well.
  • The fifth largest investment is a telecom company. Telecommunications is used at a greater rate than previously now.
  • The sixth largest investment is a pulp/paper manufacturing company. You know how everyone is buying toilet paper like crazy.
  • The seventh largest investment is a cement/pavement company. Yes, construction might slightly decrease, buy probably only temporarily. Governments have funds to pay for paving roads, but the cement business might decrease somewhat. It won't go bankrupt, though.
  • The eighth largest investment is a wind turbine manufacturer. Installation of new capacity might reduce somewhat, but I suspect a wind turbine company won't go bankrupt.
  • The ninth largest investment is an electrolysis cell manufacturing company. Installation of new electrolysis cells might decrease, but I don't believe the company will go bankrupt due to great business prospects.
  • The tenth largest investment is a heat pump manufacturing company. Existing broken heat pumps need replacement. Heat pumps to new buildings could be delayed due to construction downturn, but I suspect the company survives.

But, let's take a look at various service sector companies.

  • Gyms: closed, rent has to be paid, but no customers
  • Restaurants: closed, rent has to be paid, but no customers
  • Photography companies: closed, rent has to be paid, but no customers
  • Nightclubs: closed, rent has to be paid, but no customers
  • Bars: closed, rent has to be paid, but no customers
  • Barber shops: closed, rent has to be paid, but no customers

You get the idea. Many of these small services sector companies will go bankrupt.

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    In 2008, of the 11 sector SPDRs, the top 3 performing sectors were Utilities (-43%), Health (-37%) and Staples (-31%). Everything got pounded when the market dropped 50% during the GFC. Tax revenues contracted so deeply that some U.S. states were tearing up paved rural roads because they couldn't afford to maintain them. A deep bear market spares very few sectors. – Bob Baerker Apr 6 at 4:29
  • This answer doesn't take into account higher-order effects. If the small guys are all bankrupt, they will not have money to pay for the services and products they used to consume before, putting a strain on the revenues of all companies within the economy. – Paul Razvan Berg Apr 8 at 2:17
  • You should be cautious about what you said in your first answer. Telling people that it is a "good opportunity" to invest in a volatile and uncertain period isn't necessary safe or good advice. I think a lot of inexperienced investors could make some poor decisions by accident as a result. Always worth presenting a comprehensive analysis of the risks and uncertainty at hand when it comes to investment advice. People always want to hear about "good opportunities" to make money. They rarely work out in their favor, though, and that rarity should be communicated. – user96764 Apr 8 at 21:07
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Much of the US in general is still in denial about what is happening. They think: "the markets dove, they recovered a little, and now they are relatively stable and will soon resume their normal gradual climb".

And more than any other country, many individual Americans are going to resist being told what to do.

Just look at how long it took for people to wear seat belts (many still don't). Look at how flood and hurricane warnings are ignored by people that refuse to leave their homes. "I survived the last three, I'm not going to chicken out this time."

And look at what many people are actually doing now: "This is my church, and I'm not going to stop attending services because some politician tells me to. Jesus will protect me."

To make things worse, US financial technology lags much of the rest of the world. Many people prefer using cash over plastic. And for those that do use cards, many stores don't provide contactless debit and credit machines, instead they require manual card insertion and button pushing. Some still even require signatures, with everyone sharing the same pen.

Within a few weeks the situation in the US is going to get really bad, really quickly, and the market will experience another very large drop.

The social, economic, and mortality disaster will of course be blamed on government, racists, and the wealthy.

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The market is always priced right for a large group of people assessing future reward vs future risk, and being motivated to buy or sell from other people, today.

Your assessment of future possible reward vs risk may be different. Your need to buy or sell may be different.

The market reflects the opinions of a pool of people. Their votes are not equally weighted, since current price just reflects the agreement between buyers and sellers. The # of buyers and sellers, and who they are, varies at any time.

Their reasons for buying and selling may not be primarily driven by a future reward/risk assessment.

So: current prices reflect all those issues. It's up to you to assess whether the current prices represent an opportunity for you.

A mistake is thinking that daily prices primarily reflect a notion of "value".

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Another part of the answer: The market prices are being supported by put options that expire on the middle Friday of each month. Market Makers have to take the opposite side of those trades AND at the same time remain delta neutral. This is called a “put wall”. Market mechanics make it very difficult to climb over put walls unless the vix also continues to rise. The vix is falling.

This is why markets tend to hemorrhage slowly over time as option hedges expire.

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  • I don't follow your answer. A market maker isn't always on the other side of the trade.The counter parties could be you and me without any hedging with the underlying. Say the MM.is hedging. He could be short the underlying via a reversal to offset the put buyer. He could also be long the underlying to offset a put seller (conversion). Or maybe he just delta neutral hedging with the underlying to offset the < 1.00 delta of the option. I think institutional selling in the underlying is the significant reason for the hemorrhaging not some more modest amount of MM hedging with the underlying. – Bob Baerker Apr 6 at 10:47
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    There is a lot to say about the large gamma positions of investment banks that tend to drive the prices at the end of the day (this comes from the hedge of structured products). If banks are short gamma they must buy when market drops and sell when market rises, which stabilizes prices (like before march). If they are long gamma it is the contrary and market moves are amplified (like in early march). Now as the market has fallen most of the open interest on the option market is for options that have hardly any gamma, but this will change as banks rehedge. – Alexandre C. Apr 6 at 18:58
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    @BobBaerker There is a substantial amount of gamma coming from the structured products. Investment banks hedge in delta. The gamma is the amount of additional delta they have to trade (typically around market close). Option market makers hardly have any remaining gamma due to the large market moves, but structured products still have some convexity. Looking at the low volumes, it's more the /lack/ of gamma in the market that strikes me. – Alexandre C. Apr 6 at 19:02
  • Hmm interesting point. Since intraday moves are averaging about 4% per day, that’s 10 to 20 times higher than when vix is in the low teens. So are gamma values about 1/10th of what they normally are? – Keith Knauber Apr 6 at 19:13
  • And lol what’s your prediction for Tuesday’s close? I’m thinking spx closes today right at the 2630ish resistance, then gaps up tomorrow. – Keith Knauber Apr 6 at 19:17
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The FED is buying, propping up the markets to keep down the panic. All the while the banks are selling into the rallies. Small investors believe they have caught the bottom, and that markets will always go upward long term. Investing for some is no different than going to a casino. They really don't understand the game and roll the dice with each investment/bet.

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I'd like to emphasize the aspect that the initial Corona crash, by which I mean the sharp 25%-40% market drop (where the percentage depends on the market you look at) has happend as fast as no crash before.

Therefore, I believe (in agreement with Hart CO) that not enough time has passed since the record highs to be able to judge the situation properly. Perhaps even more importantly, not enough time has passed yet to eradicate the large amount of "greed" that has been in the market in the last 10 years.

The difference between a bull and a bear market is characterized in my opinion (which makes me strongly disagree with the accepted answer) to a large extent by what happens during times when there is no significant news. In the last ten years, it seems to me that many people (including myself) got used to the "general bull market rule" that

the market goes up as long as there is no really bad news.

Over those years, a substantial "fear of missing out on future growth" has developed, which, after just a couple of weeks into the Corona crash, is still quite strong and currently seems to overwhelm the fear of losing money in future market drops. The "general bull market rule" still applies: as long as there is no really bad news besides all the Corona horror stories that are already being taken into account, the market goes up.

In the bear markets I recall (the ones after 2000 or 2008) I remember that (at least for some limited amount of time) a prominent feeling developed that the previous record highs had been ridiculous and this was taken as a sign that the stock market is crazy and might actually have no future (in the sense that one might never see those "ridiculously" high numbers again). For a while, the "general bear market rule" applied:

the market goes down as long as there is no really good news.

It seems to me that we are currently still very far from such a point of view - the ubiquitous mantra of the last ten years that the stock market will go up in the long term is still in everyone's ears. I'm curious to see if the upcoming recession will create a (temporary) counter-mantra of similar strength (like 2000 and 2008) or not.

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There's an analysis of this same question at the New York Times today: Everything Is Awful. So Why Is the Stock Market Booming? The main takeaway:

Two powerful forces are pushing in opposite directions. Commerce is being disrupted to a degree that seemed impossible just weeks ago. But simultaneously, stock investors are betting that powerful interventions out of Washington — including an additional $2.3 trillion in lending programs from the Federal Reserve announced on Thursday — will be enough to enable major companies to emerge with little damage to their long-term profitability.

Other factors mentioned:

  • Large S&P companies likely to weather crisis (while small companies fail), and hence actually expand market share
  • Rush of money into safe investments pushing down long-term interest rates and hence making stocks look relatively better
  • Truce between Saudi Arabia & Russia to cut oil output

But:

“If this doesn’t go on much longer than expected, if it really is a three- to six-month event from the time we turned the switch on the economy off to when we turn it on, then markets have already accounted for that and are looking ahead,” said Jim Paulsen, chief investment strategist for the Leuthold Group. “It could be that the virus stays hot, and this situation stays in place for three or four quarters, and we’re not priced for that.”...

The current pricing assumes that a cascading series of failures will not happen. That widespread job losses and drops in income won’t cause the mass closure of businesses. That people will have a job to go back to and will be willing to spend when the public health crisis ebbs.

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-1

After a war, the economy rebounds. It is a frequent phenomenon (it would be great if war were less frequent). A war takes its worst toll on the young and strong. Covid-19 takes its worst toll on the old and frail. The old and frail have earned pensions and don't contribute significantly to the GDP (though their participation in consuming goods in economies with large GDPs may actually provide a sink for the output of ever-rising productivity).

Once this blows over, the age structure of the remaining populace will be better for national productivity. This will be the more the case, the more replaceable individuals are in the fabric of a society.

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    This. And if this terns into a "real apocalypse", consider that the Black Death (which killed between 40% and 60% of the entire European population in a few years) was actually positive force for economic, social, and political change. Without it, we might still be living (mostly as serfs at subsistence level) in the same conditions as the Middle Ages. – alephzero Apr 5 at 1:00

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