I follow the market every day. It is rushing to recover losses over the last few weeks. However, stock prices are not mirroring the actual activity of the companies, only because liquidity in market shares costs more. There is no connection to company activity.
How does this make any sense?
Stock prices are not tied to current performance, they are tied to future performance that may be tied to current (and future) market conditions. So if the market thinks that a company will perform poorly going forward based on the current environment, then it's likely that it's stock price will suffer.
The financial (i.e. ignoring voting rights) value of a stock is tied to the future cash flows of that portion of ownership. That cash flow can come in the form of:
Income for a company increases its value in an acquisition/liquidation scenario - and dividends/buybacks are a way to directly distribute profits to shareholders. So the more profitable a company is in the future, the more it's stock is worth. That's why you see many companies like Facebook lose money hand over fist for years, but their stock is highly valuable - because the expectation is that at some point the company will become profitable as it builds market share, loyalty, etc.
Consider an individual company. Or, a portfolio of companies.
At discount rate of 10%, and growth rate of 4%, one dollar of yearly income is worth 18.3 USD. (If you want the formula, open GNU Octave or Matlab and type sum(1.04.^[0:1000] ./ 1.10.^[0:1000]) into it).
Now, if this year, income drops by 20%, instead of getting 1 USD, you get 0.8 USD, the company (or portfolio of companies) is worth 18.1 USD.
According to this calculation, a temporary 20% drop to gross domestic product should cause an approximately 1% drop in stock prices (18.1 / 18.3 = 0.989 so more precisely it's 1.1% drop).
Yet, stocks have fallen over 25%.
That doesn't make sense to me.
For some reasons, investors have panicked. They should not have panicked.
Now the recent rise in stock prices from the bottom just is due to slightly lessened panic.
That still doesn't change the situation that stocks are 25% cheaper than they used to be.
