ogc163
Superstar
The gyrations of the world’s stock markets around the time of the onset of the coronavirus, Covid-19, pandemic have seemed illogical to many observers. The S&P 500 stock price index set an all-time record high on February 19, 2020, after over a month’s news of the epidemic. The World Health Organization had already labeled it a “public health emergency of international concern” on January 30 when the epidemic had already spread from China to 18 countries. This peak was a few days after news that the epidemic in China had already attacked 66,000 victims and caused 1,500 deaths.
Wouldn’t you think the “smart money” and people on their toes would have seen trouble coming by then? Were they even paying attention?
Maybe that drop could be justified from the dire pandemic narratives that were circulating then. But from there, with stay-at-home orders proliferating around the world, the S&P 500 rose 30% to April 30, 2020, amidst nightmarish figures, over three million cases worldwide and over 200,000 deaths.
Wouldn’t you think that there wasn’t much good news that would justify such a massive rebound? How can we explain what drove the market so rapidly up?
The economics profession has an explanation for this difficulty based on the idea that markets are “efficient.” If markets are perfect, prices will incorporate all publicly available information about the future. Speculative prices will be a “random walk,” to borrow a phrase from the physicists and statisticians. The changes in prices will look random because they respond only to the news. News, by the very fact that it is new, has to be unforecastable, otherwise it is not really news and would have been reflected in prices yesterday. The market is smarter than any individual, the theory goes, because it incorporates information of the smartest traders who keep their separate real information secret, until their trades cause it to be revealed in market prices.
Burton Malkiel’s classic book A Random Walk Down Wall Street, first edition 1973, almost a half century ago, has been a long-term best seller, with 12 editions and over 1.5 million copies sold. It made the term “random walk,” a household phrase, although in truth it did not say that stock prices were exactly a random walk.
I wrote books that presented evidence for a seemingly very different idea about speculative prices, Irrational Exuberance, 2000, and Narrative Economics: How Stories Go Viral and Drive Major Economic Events, 2019. Speculative prices may indeed statistically resemble a random walk, but they are not so tied to genuine information as random walk theorists say. They are driven by somewhat predictable epidemics of popular narratives. The contagious stories about the coronavirus had their own internal dynamics only loosely related to the information about the actual truth.
I wonder how Burt would interpret this strange market behavior around the time of the coronavirus.
Wouldn’t you think the “smart money” and people on their toes would have seen trouble coming by then? Were they even paying attention?
Maybe that drop could be justified from the dire pandemic narratives that were circulating then. But from there, with stay-at-home orders proliferating around the world, the S&P 500 rose 30% to April 30, 2020, amidst nightmarish figures, over three million cases worldwide and over 200,000 deaths.
Wouldn’t you think that there wasn’t much good news that would justify such a massive rebound? How can we explain what drove the market so rapidly up?
The economics profession has an explanation for this difficulty based on the idea that markets are “efficient.” If markets are perfect, prices will incorporate all publicly available information about the future. Speculative prices will be a “random walk,” to borrow a phrase from the physicists and statisticians. The changes in prices will look random because they respond only to the news. News, by the very fact that it is new, has to be unforecastable, otherwise it is not really news and would have been reflected in prices yesterday. The market is smarter than any individual, the theory goes, because it incorporates information of the smartest traders who keep their separate real information secret, until their trades cause it to be revealed in market prices.
Burton Malkiel’s classic book A Random Walk Down Wall Street, first edition 1973, almost a half century ago, has been a long-term best seller, with 12 editions and over 1.5 million copies sold. It made the term “random walk,” a household phrase, although in truth it did not say that stock prices were exactly a random walk.
I wrote books that presented evidence for a seemingly very different idea about speculative prices, Irrational Exuberance, 2000, and Narrative Economics: How Stories Go Viral and Drive Major Economic Events, 2019. Speculative prices may indeed statistically resemble a random walk, but they are not so tied to genuine information as random walk theorists say. They are driven by somewhat predictable epidemics of popular narratives. The contagious stories about the coronavirus had their own internal dynamics only loosely related to the information about the actual truth.
I wonder how Burt would interpret this strange market behavior around the time of the coronavirus.
