Does the stock market reflect the economy?
The firms listed on the stock market in aggregate as well as the top market capitalization firm contribute less to total non-farm employment and GDP now than in the 1970s. A major reason for this development is the decline of manufacturing and the growth of the service economy as firms providing services are less likely to be listed on exchanges. We develop quantitative measures of representativeness showing how firms’ market capitalizations differ from their contribution to employment and GDP. Representativeness is worst when the market is most highly valued and worsens over time for employment, but not for value added.
Has the Stock Market Become Less Representative of the Economy?
Authors: Frederik P. Schlingemann, René M. Stulz
From: University of Pittsburgh, The Ohio State University
Is the US market overvalued?
Kevin Lansing in this commentary uses a valuation model that incorporates a small set of economic variables that can help account for movements in the CAPE ratio ( the cyclically adjusted price-earnings (CAPE) ratio, originally developed by Campbell and Shiller (1998) ) to help gauge whether the stock market is overvalued. The CAPE ratios predicted by this model for the second and third quarters of 2020 are much lower than the actual ratios, suggesting overvaluation in the actual ratios. But if the uncertainty index is omitted (green line from the figure below), the model predicts CAPE ratios in the second and third quarters that are closer to the actual ratios, suggesting more reasonable valuation. It appears that investors are reacting to macroeconomic uncertainty very differently during the COVID-19 outbreak than they did during the financial crisis.
Assessing Recent Stock Market Valuation with Macro Data
By: Kevin J. Lansing – Federal Reserve Bank of San Francisco
Optimism over a vaccine drives earnings expectations
Hong and al. are using a simplified version of a pandemic damage model of earnings to infer from analysts’ earnings forecasts whether the COVID shock will only affect earnings short-term. They find that analysts’ expectations heavily rely upon the expected arrival of a vaccine which will revert earnings to normal. In particular, they expect the vaccine to be available in the middle of 2021 and function as a silver bullet for corporate earnings.
Pandemics, Vaccines and Corporate Earnings
Authors: Harrison Hong, Jeffrey Kubik, Neng Wang, Xiao Xu, Jinqiang Yang
From: Columbia University, Syracuse University, Shanghai University of Finance and Economics
