Anti-Trump Sentiment Could Undermine a Recovery in Stock Prices

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Robert Shiller says that stock prices are determined only partly by economic developments. Another big factor is shifts in investor emotion. If that’s so, in assessing how stocks are likely to perform over the next year or two, we need to be looking not only at how the nation copes with the economic shock delivered by the coronavirus crisis but also at how investors react emotionally to developments related to it.

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A New Investor Narrative

Shiller has said that he could see a new narrative developing in investors’ minds re stocks. In the event that prices drop hard and then remain at lower levels for a significant amount of time, investors may lose confidence that prices will ever return to their pre-coronavirus levels. At some point, a new investor narrative will set in and lower prices come to be widely perceived as the proper prices.

President Trump has made clear that he does not want to see that happen. Trump is up for reelection in November. In the days before the coronavirus crisis, he often pointed to the high stock prices that prevailed in those days (the CAPE value was 32 prior to the onset of the crisis) as evidence that he had done a good job managing the economy (under the Buy-and-Hold Model for understanding how the stock market works, it is economic developments alone that determine stock prices).

Trump is a highly polarizing figure and even the question of when and how the economy should be reopened is beginning to break down to a large extent along party lines. Many investors who are not Trump supporters are skeptical of plans to open the economy too soon. Could their opposition to Trump’s plan to get the economy reopened quickly translate into a reluctance to participate in a stock price recovery?

I believe that it could.

Investors are not necessarily aware of the emotions that cause them to believe that stock prices will he heading upward or downward in coming days. In fact, irrational exuberance by definition requires self-deception. If we knew why we were pushing stock prices higher or lower and were aware that we were doing so for irrational reasons, we would not do what we were doing. Shiller’s theory posits not only that investors are irrational but that they are generally not aware of their own irrationality.

A Stock Price Recovery Might Be Viewed Negatively

Economic success is generally not viewed as a polarizing issue. We all want the economy to thrive because we all participate in the financial rewards that follow from it doing so. But in the particular circumstances that apply today, I could easily see economic success being viewed as a mixed blessing in the eyes of the millions of investors who would like to see Trump replaced at the end of this year. Those investors might feel that a short time-period of economic bad times would be a small price to pay for seeing Trump removed from office. In the eyes of those investors, a stock price recovery might come to be viewed as more of a negative than a positive.

I doubt that this has even been as much the case as it is today. In the usual case, there are all sorts of circumstances that are perceived as affecting whether a president will be reelected or not. In this case, Trump has focused on high stock prices as evidence that he is doing a good job. And, in the usual case, slumping stock prices are not taking place in an election year; so even investors who did not want to see the current president get credit for rising stock prices would not wish for low stock prices that would deny them wealth. But in this case we are six months to an election. So even a short-lived drop in stock prices could be devastating to Trump’s reelection prospects.

Would investors deliberately sell stocks just because they did not want to see Trump reelected? I doubt that many would do this as a conscious strategy. But I do think that investors who have strong feelings about the election might come to feel less confidence that there will be an economic recovery without knowing precisely why they are experiencing those feelings and that those feelings might cause stock prices to tumble.

It’s another way in which Shiller’s insight that investor emotion affects stock prices more than most of us realize could affect our world in a way that few of us have considered until now.

Rob’s bio is here.