One only needs to look at the trend in railroad traffic this year vs the trend in railroad stock prices to see that investors are defining a “return to normal” economic activity as the pre-recession level.
However, utilizing a reasonable 2% economic growth pre-recession rate (since 2007, economic growth has barely averaged 2%) and current employment levels tell us intuitively that stock prices reflecting a return to normal aka pre-recession level in 6,12, or even 18 months is delusional.
If demand is down 50% then you’ll eventually have to cut costs 50%.
US organizations have cut costs by laying off approximately 15%. Assuming demand/expected demand is down approximately 15% then WHY would you then think we’ll be back to pre-recession economic levels in a year or so? Sorry, you can’t turn 2% growth per year into a 15% rebound in 6 months, 1 year, 2 years, 3 years, or even 5 years.
Shouldn’t stock prices reflect the present value of expectations of aggregate demand activity reset to a pre-recession level PLUS a REASONABLE expectation of growth (the 2% pre-recession rate) in demand and earnings in the future?
Therefore, a reasonable back to normal doesn’t mean you should bid up stock prices to pre-recession levels. A more reasonable decision would be to bid them down to at least a March 2009 level (the start of the last bull market).
Employment Has Been Reset to a 2002 Level
2020 Economic Demand So Far: Down 15%
Current Economic Expectations:
Return to Pre-Recession Level
Railroad Stocks Up 57% On Expectations of Aggregate Demand Activity,
Returning to 2019 levels