January 08, 2021

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The way we understand the eras we live through  —  from world wars, to the rise of the internet in the 2000s, to the pandemic of today  —  also directly impacts the economy. That’s according to Robert Shiller, a winner of the 2013 Nobel Prize in economics, a professor of economics at Yale, and the author of “Narrative Economics: How Stories Go Viral and Drive Major Economic Events.” He argues that the big events we experience and our perception of them shape the stock market in serious ways, often priming it for a boom or a bust.

Main Takeaways:

  • Our hopes, worries, and fears weigh on stock prices. We saw this phenomenon when the dot-com bubble burst in 2000, for instance, and we may be seeing it again now as stock prices rise higher and higher. Shiller connects these soaring numbers with the huge importance of digital communication technology amidst the COVID-19 pandemic and the United States’ dominance in the field. Plus, despite global uncertainty and high unemployment, Shiller thinks the atmosphere of the Trump era, during which the White House was led by a “flamboyant businessman with a personal sense of style,” has had a great deal of influence on those high stock numbers. 
  • The influenza epidemic of 1918 did produce a mild recession, but it was small compared to the economic effects of the COVID-19 pandemic. One of the big differences that Shiller sees between the two, is that the epidemic of 1918 came on the heels of the massive devastation caused by World War I, so he believes people were somewhat numb to the death tolls caused by the Spanish flu, giving the disaster a different impact than what we’re seeing today. 
  • The housing market and the stock market often do not move in lockstep. In the 1930s during the Great Depression, housing prices fell some, but mostly held steady, despite a huge drop in stocks. Similarly, the real estate crash of 2008 was not nearly matched by falling stocks. Shiller says that, now, confidence among investors is low - people believe we are headed towards a major crash and the fear of that could create a self-fulfilling prophecy.

More Reading:

  • Shiller has been collecting data for decades on how much individual and professional investors are concerned about a 1929-style crash. You can peruse the data here and see just how worried investors are today.
  • Just as housing prices and the stock market aren’t always in lockstep, the stock market doesn’t always reflect the economic prosperity (or hardships) of a country. Give this article a read to learn more about why stock prices can be so high when so many people are out of work.
  • Have you checked your stocks in a while? Here’s a guide on some easy investments to consider right now.

stocks, Robert Shiller, Stories, economics

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