Robert Shiller: When a Stock Market Theory Is Contagious

When a Stock Market Theory Is Contagious via Robert Shiller of The New York Times

Since Sept. 18, the stock market has fallen more than 6 percent. An abrupt decline last week — after five years of gains — prompted fears that the market may have reached a major turning point.

Has a bear market begun? It’s a great question. The problem is that short-term market movements are extremely hard to forecast. But we live in the present and must try to understand what’s driving markets now, even if it’s much easier to predict their behavior over the long run.

Fundamentally, stock markets are driven by popular narratives, which don’t need basis in solid fact. True or not, such stories may be described as “thought viruses.” When they are pernicious, they are analogous to the Ebola virus: They spread by contagion.

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Theories that seem to explain the stock market’s direction often work like this: First, they cause investors to take action that propels prices even further in the same direction. These narratives can affect people’s spending behavior, too, in turn affecting corporate profit margins, and so on. Sometimes such feedback loops continue for years.

The most prominent story since the September peak seems to be one of a “global slowdown” with associated “deflation.” Underlying this tale are deeper, longer-term fears. There is a name for these concerns too. It is “secular stagnation” — the idea that there is disturbing evidence that the world economy may languish for a very long time, even for generations, as the word “secular” suggests.

I did a LexisNexis count of newspaper and magazine mentions, by month, of the phrase “secular stagnation,” and I found that they have exploded since November 2013. And a Google Trends search shows a similar pattern for web searches for the phrase since that time.

Why? It’s probably because Lawrence H. Summers, the former Treasury secretary and Harvard president, used the phrase in a talk he gave on Nov. 8 at the International Monetary Fund in Washington.

See full article via The New York Times