strange event. Most people couldn’t get a handle on it immediately, let alone imagine that others who might influence market prices were doing so. As the stock market downturn proceeded, vivid stories appeared of hardship and business disruption caused by the lockdown. For example, some people in locked-down China reportedly were reduced to searching for minnows and ragworms to eat. In Italy, there were stories of medical workers in overwhelmed hospitals being forced to choose which patients would receive treatment. Narratives about the Great Depression of the 1930s flourished. The beginning of the third phase, when the S&P 500 market began its 40% rise, was marked by some genuine news about both fiscal and monetary policy. On March 23, after interest rates had already been cut to virtually zero, the U.S. Federal Reserve announced an aggressive program to establish innovative credit facilities. Four days later, Trump signed the $2 trillion Coronavirus Aid, Relief, and Economic Security (CARES) Act, promising aggressive fiscal stimulus. Both of these measures, and similar actions in other countries, were described as resembling the actions taken to counter the 2008 to 2009 Great Recession, which was followed by a gradual but ultimately huge increase in stock prices. The S&P 500 increased fivefold from its bottom on March 09, 2009 to February 19, 2020. Most people have no idea what’s in the Fed plan or the CARES Act, but investors did know of one recent example when such measures apparently worked.
Stories of smaller but still significant stock- market collapses and strong recoveries, a couple of them from 2018, were widely recalled. Talk of regrets about not buying at the bottom then, or in 2009, may have left the impression that the market had fallen enough in 2020. At that point, fear of missing out (“FOMO”) took hold, reinforcing investors’ belief that it was safe to go back in. In all three phases of the COVID-19 stock market, the effects of genuine news are apparent. But price movements are not necessarily a prompt, logical response to it. In fact, they rarely are. © Project Syndicate What changed investors’ thinking over that interval was not just one narrative, but a constellation of related narratives. Robert J. Shiller , a 2013 Nobel laureate in economics, is a professor of economics at Yale University and the co-creator of the Case-Shiller Index of U.S. house prices. He is the author of Irrational Exuberance, Phishing for Phools: The Economics of Manipulation and Deception (with George Akerlof), and Narrative Economics: How Stories Go Viral and Drive Major Economic Events .
American Consequences
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