The mystery of stock market behavior

In June, I talked about the possible reasons for the stock market’s crazy upswing over the course of the coronavirus pandemic. I highlighted the influence of a few mighty companies on market behavior, the effects of cheap money being pumped into the system by central banks (the U.S. Federal Reserve in particular) and the circumstance that markets are forward-looking. While these continue to be valid factors, it has become increasingly clear that they alone cannot conclusively justify the enormity of divergence between stock market performance and economic fundamentals.

Enter crowd psychology. As the great economist Robert J. Shiller explains in his opinion piece on MarketWatch, stock-market movements are not directly driven by actual news, but by investors’ assessments of how other investors react to the news. Hence, there is an inherent lag in stock market responses to real-world events to begin with. Shiller goes on to name the unfamiliarity of the coronavirus event, the impact of and perception to virus-related news (genuine as well as nonsense) and fear of missing out, or FOMO, as factors that may explain the strange investment behavior we have seen in 2020 -among it the perplexing circumstance why investors would give shares their highest-ever valuations in the immediate aftermath of a global health tragedy.

What can we learn from this? Well, for one that price movements in the stock market do not really represent a logical response to actual events in that evasive thing we call reality. But perhaps more importantly, I consider this information to be yet another reminder of the fact that investing and gambling might not be so different from each other after all.

Featured post image: Photo by Macau Photo Agency on Unsplash

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