Many of my private market investor friends are wondering why the stock market won’t go down, even when all the data in the world makes it seem like the economy is headed for hell.
Actually… all my friends are basically wondering the same thing. It’s begun dominating most conversations I’ve been having.
Here are some of my hypotheses on why this is happening.
Importantly, the stock market is NOT the gauge of how the economy is doing, it’s ONE OF the gauges of how PART of the market is doing. Primarily, it is ONE OF the gauges of how publicly listed companies are doing.
And so here are a list of some possible reasons the stock market hasn’t fallen as much as we expected it to (or rather, why it’s rebounded):
(1) The parts of the economy being hit most are often not listed. Privately held real estate and small businesses are being hit really hard, yet are not publicly listed so that pain is not showing up. The public markets are disproportionally made up of technology companies, or other businesses that are doing okay through all of this.
(2) Public companies are not forced sellers. In venture capital, valuations are down because startups are forced sellers. Since they do not operate at a profit, they need to raise money even at inopportune times. Public companies usually are profitable, meaning they are not forced to sell shares (unless they are over-levered) when they don’t want to.
(3) Struggling public companies are getting more benefit from the gov’t than private companies. It’s much easier for the gov’t to help 1,000 struggling public companies either buy purchasing their bonds/making it easier for investors to purchase their bonds/saying they will purchase their bonds.
Donald Trump can say: “I will not let the airline industry fail.” But he can’t say: “I won’t let that hotel in your neighborhood fail.”
So less points of failure make them easier to help.
(4) Where else do you put money? Investor capital is pre-allocated into buckets. If private market valuations haven’t been marked down, but public market valuations have, allocators need to re-balance because they don’t “time the market” and this causes general inflows.
In short — it’s not that surprising to me that the stock market is doing okay. The companies in the publicly listed indexes don’t need to sell equity, for the most part. And the ones that need to issue bonds have been able to with the support of the government. And a majority of the pain being felt is in private markets/small businesses/hard to reach corners that stimulus packages can’t appropriately reach.
One crazy thing is that private equity and VC backed companies will probably struggle more than public companies will. Why?
Because government aid is being pointed at public companies, and PPP loans are going to non-P/E backed small businesses, but the world has decided it’s immoral for most startups to take PPP money.
For some reason we don’t mind publicly held companies issuing bonds supported by the gov’t (raising cheap debt the gov’t is helping make sure can get sold), but we are up in arms if a startup tries to take gov’t stimulus because it’s expected that VCs will philanthropically risk their LP capital… which isn’t theirs… to avoid down rounds and layoffs. Yeah right.
Also — a lot of private market investors are pissed off about it. They WANTED to say: “hey! Look! Public markets are cyclical, but my investments are more market resistant because we take a long term view and are subject to market volatility and vicissitudes. But as the stock market rallies, it makes private market investors look worse, making them angry… and making them tweet things like: “hey, the stock market doesn’t work!”
And they’re right… it kinda doesn’t, and the gov’t is not letting crappy companies struggle. But, that’s life.