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Matt Levine

Markets Are Down for a Reason

Also the Fed’s response, capital requirements, opportunistic M&A and securities fraud.

It is conceivable that the present value of the expected future earnings of big U.S. public companies declined by more than 7% this weekend. I don’t know, I’m not saying that it’s true, but it’s conceivable in a way that I am not sure it ever has been before. Not that expected earnings have never declined before, or by a lot, but in a weekend? But the epidemiological and, especially, economic news of the coronavirus is moving really fast. On Saturday night restaurants and bars in New York City were busy, now they are closed, and I suspect a lot of the economy is following more or less the same path on more or less the same timeline: nervous but resilient last week, shut down this week. If your business is closed it will make less money than if it is open; if it is closed for months it will make a lot less money. If you are buying the future earnings of businesses, you should probably pay less now than you would have last week, never mind a month ago.

A decent general model for the stock market is that economic news moves slowly and stock traders get bored and overreact to stuff. People carefully parse economic data and Fed press releases to get subtle clues about the second derivative of changes in the economic environment, and then make large bets based on their conclusions, and many of those bets will be wrong. Stock prices move around far more than corporate incomes do, meaning that the volatility in stock prices is hard to justify on the economic fundamentals.