EconAir

    WHY STOCK PRICES GO UP   The movement of a stock index such as the S&P 500 or an individual stock depends on two things:   Earnings per share (EPS) and changes in EPS. Stock price/earnings per share ratio (PE ratio) and changes in the PE ratio.   If the PE ratio stays the same, an increase in EPS leads to an increase in the stock price. The same is true of a stock index. Rising EPS combined with a rising PE ratio is often the reason why a stock goes up more than the average stock.   Well, that was easy. Well, not really.   The stock market is “forward-looking,” that is, it tries to anticipate changes, especially changes in EPS and the PE ratio. There is a great amount of forecasting. But since the forecasted changes are in the future, they are inherently uncertain. The forecasts of some companies’ EPS are more uncertain than others. Some are very uncertain. For example, the future sales and earnings of a small biotech company may depend on the success of a clinical trial and FD

    INTRODUCTION:  SIMILARITIES AND DIFFERENCES BETWEEN 1929 AND 2020   Gamestop! Short squeeze! Bitcoin! Options! IPOs! SPACs! Hydrogen trucks! Tesla up 800%! Market valuations in bubble territory. And my favorite “blue sky” stock - Virgin Galactic.       At first sight, there was nothing in 1928-1929 similar to the impact of Covid-19 on the economy. Actually, there was. In 1927, Ford closed down his entire company to retool for a new line of cars. 70,000 people were thrown out of work; many more at suppliers also lost their jobs. But everyone knew that Ford would start up production again.     Ford began production in 1928; 1929 was a record year for auto production. But in late summer and early fall, inventories began to build up.   Both periods were preceded by speculation in real estate. Both ended badly, closing off an alternative area of speculation.   Both periods (1920s and 2010s) saw an increase in income inequality. Large parts of the labor force, particularly farmers in the

It is a puzzlement why the stock market can go up while the economy is in a virus-caused depression. Much of the economy is in lockdown or closed because of decreased consumer demand. As many of one-third of workers and many small businesses are on federal life-support programs. Profits have disappeared. Large numbers of bankruptcies loom. Given the uncertainty, including recent record numbers of new virus cases, the usual stock evaluation metrics are worthless. With the economy tanking, how come the stock market has gone up dramatically? And continues to go up. THE STOCK MARKET Let’s decompose the stock market. When people talk about the stock market going up or down, they usually refer to an index such as the S&P 500 as the measurement. The S&P 500 is a market-value (cap, short for capitalization) weighted index. The ten most valuable companies account for over 20% of the total value of the index. There are over 3,000 actively traded stocks. But the 500 comp

This primer is aimed at the long-term investor. But this does not mean that you should necessarily hold all of the stocks and funds in your portfolio for a long time. WHY STOCK PRICES GO UP The movement of a stock index such as the S&P 500 or an individual stock depends on two things: Earning per share (EPS) and changes in EPS. Stock price/earnings per share ratio (PE ratio) and changes in the PE ratio. If the PE ratio stays the same, an increase in EPS often leads to an increase in the stock price. The same is true of a stock index. Rising EPS combined with a rising PE ratio is often the reason why a stock goes up more than the average stock. Since 2009, the beginning of the stock market recovery from the last recession, most of the increase in stock prices has been due to the increase in earnings per share (EPS). Well, that was easy. Well, not really. The stock market is “forward-looking,” that is, it tries to anticipate change, especially cha