Aggregate Demand & Back to Normal

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

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