
Ask HN: Why is the stock market so high? - samayshamdasani
It hit 21,000 today and I don&#x27;t see any direct results from this. Is it inflated?
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brudgers
One feature of the Dow Jones Industrial Average is that when a company is
doing poorly, it is removed from the average and replaced by one that is doing
well. [1] If AIG, Honeywell, Eastman Kodak, Sears Roebuck, etc. were still in
the basket, the average would look different.

If a person could just swap out losing stocks for winners without realizing
losses, everyone's investment could be above average too.

[1]:
[https://en.wikipedia.org/wiki/Historical_components_of_the_D...](https://en.wikipedia.org/wiki/Historical_components_of_the_Dow_Jones_Industrial_Average)

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ptype
This is the case of most market cap indices. There is no problem with that
unless the history is revised. You could replicate the same performance in
your own stock account. (Not sure what you mean by "without realising
losses"?)

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brudgers
Dow Jones 'performance' is based on a price-weighted average. If a $2 per
share stock goes to $1, $200 per share stock going to $201 offsets the loss.

If $400 were allocated equally among the two stocks, an actual investor would
lose 25% ($100) while the Dow showed no movement.

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ptype
Yes, so you should not allocate the $400 equally across the shares to match
the performance of the index. You should buy an equal number of shares of each
stock. It may not be a greatly constructed index by modern standards but to my
understanding you can in theory get the same performance yourself.

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brudgers
Buying an equal number of shares does not track the DJIA either. Apple closed
at 126.6 the day it replaced ATT. ATT closed at 33.48.

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ptype
I struggle to see why that is a problem? You will need to rebalance the
portfolio, yes.

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brudgers
The DJIA replaced each share of ATT with a share of Apple on a ledger. Without
additional investment or buying and selling other assets, there's no way to
replicate that in a portfolio due to the difference in share price.
Essentially, the DJIA pumped in an ~300% increase in equity value on the ATT
shares...or divided among thirty companies a 10% profit.

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mercury_craze
Planet money ran a typically excellent episode on why the Dow is a terrible
mechanism for measuring the health of the economy. About the only redeeming
feature it had was the length of time it has been running allowing it to be
used to compare the state of the economy going back > 100 years.

[http://www.npr.org/sections/money/2017/01/04/508261371/episo...](http://www.npr.org/sections/money/2017/01/04/508261371/episode-443-dont-
believe-the-hype)

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csense
Much has been made of inequality recently. If a rich person makes N times as
much a poor person but doesn't consume N times as much, they'll tend to park
their excess income in financial assets. So if money's trickling up to the
rich faster than new investment opportunities arise, then the rich people will
have more money to bid against each other for assets like stocks. It's easier
than ever to trade stocks and there's more and more information about it,
meaning more and more people are investing in businesses. The US trade deficit
means there's more foreign capital inflow, which is propping up asset values
as well, not just stocks but real estate too.

I suspect QE might play some role in stock market prices too, the Fed's been
printing an awful lot of money (although a lot of it's been used to shore up
bank balance sheets rather than being used to buy stocks). Also, interest
rates have been low for a long time. Meaning money that used to buy bonds is
buying stocks instead, which pushes up the price of stocks. And now that the
Fed's thinking about raising rates, there may be something of a rush to get
out of bonds before it happens.

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taway_1212
My bearish instincts (not strongly founded in anything, I'm not a full time
trader):

All the money printed in QE needs to be parked somewhere. There aren't that
many ways to invest money now, and the stock market offers some protection
against the dollar crashing (not as good as gold, but gold does not yield
divideds).

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mchannon
One likely possibility is mention of this presidential administration changing
US corporate taxation to something more focused on capital flow across
borders. It's in some ways similar to a VAT- a lower possible rate, but
closing loopholes that strand revenues overseas, and eliminating almost every
incentive for corporations to domicile offshore or adjust the books so that US
taxes are avoided.

One aftereffect of this policy, which has its fans on both sides of the aisle,
is the prospect of not so much a stronger dollar, but far weaker currencies
for countries that derive their survival on multinational corporations taking
advantage of the current US corporate tax system.

As a result, you can still either invest in stock in XYZ in, say, Honduras,
or, own stock in the US fortune 500. As many look to the future, the better,
safer bet is looking more like the latter than it used to.

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quirkot
There are more buyers than sellers lately

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bsvalley
2 things I can think of - investors (= people who buy stocks on the market)
are enthusiastic about the recent changes in the government from an economy
stand point.

Then the state of the current economy after the previous government. The FED
feels confident enough about the recovery since 2008 and will raise its rate
significantly. This alone will create an inflation. The US dollar will raise,
mortgage rates will raise, etc.

People are bull for sure because they think short terms. They've been holding
a lot these last 2 years since people were affraid of an eventual collapse of
the market (bubble). Which never happened. BTW - Warren Buffet is %100 bull.
That tells you something. I personally believe that the next year or so will
be bull for sure unless someone crazy decides to attack North Korea or Iran :)

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nicholas73
The market broke out both from promises of massive spending from Trump, and
from expected interest rate increases that drives the dollar higher - drawing
foreign money into the US (plus foreign economies are not doing well).

It's not cheap but not at bubble levels either. It doesn't mean it won't get
cheaper or will grow to bubble levels. There is a probability for everything.

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larrykubin
The NASDAQ is over 5,000 now, but it was 5,000 17 years ago in the year 2000.
Think about what has changed between now and then. Google barely existed,
Facebook didn't exist, Amazon was an online bookstore. Apple was struggling
and the iPhone and iPod did not exist. Now these are the largest companies in
the world. We got people working on self driving cars and going to Mars. These
companies are making real money now. If anything, stocks should be higher.

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PaulHoule
p/e ratios were on the high end of normal and the low end of bubbly before
election day.

The rise in prices since then is consistent with increases that could be seen
in earnings due to tax cut and other fiscal stimulus.

There has always been the kind of rich person who gets the hot for
Republicans, and that kind of person could be buying stocks. That kind of
person though is not a paragon of good judgement. (Ex. They though Jeb Bush
was a viable candidate.)

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bsvalley
The largest buyers (movers) on the stock market are large corporates and
financial institutes not individuals ;)

