STREET DOGS

Adapted from an article by Robert Shiller at The Street

It is hard to know what drives the stock market, but there are three separate phases of the puzzle in the US that reveals a puzzling association with the news, as lagged market reaction is filtered through investor reactions and stories.

The first phase started when the World Health Organization declared the new coronavirus “a public health emergency” on January 30. For the next 20 days, the S&P rose by 3%, hitting a high on February. 19. Why? One conjecture is that a pandemic wasn’t a familiar event, and most investors in early February weren’t convinced that the market paid attention to such things.

The second phase began when the S&P plummeted 34% from February 19 to March 23, a drop akin to the 1929 crash. What changed investors’ thinking over that interval was not one narrative, but a constellation of related narratives. As the downturn proceeded, vivid stories appeared of hardship and business disruption caused by the lockdown.

The beginning of the third phase, and the upswing from March 23 to the present 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, further announcements by the Federal Reserve and the $2-trillion CARES Act, along with similar actions in other countries, resembled the actions taken to counter the 2008/09 Great Recession, which was ultimately followed by a huge increase in stock prices. At that point, 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.