The stock market, which classically tells us investors’ view of the future, may have posted a gain Tuesday—for a change. But to Yale economist Robert Shiller, the future looks pretty darn grim. Recession grim.
“It’s highly likely now that we’ll have a recession,” the Nobel laureate said. “It’s already disrupting business. It’s already causing people to pull back. We’re not going to see creative new investments blossom in this environment.”
And Tuesday’s market respite is no upward turning point to Shiller because the coronavirus infections are still rising throughout the world. “This disease is contagious even before it shows obvious symptoms. So it’s going to be harder to quarantine people in this epidemic. That’s the narrative, and we haven’t gotten very far into it yet,” he told CNBC. “So the potential for market disruption because of a scary narrative is quite high.”
Shiller is a proud member of the behaviorist camp on economics, which ascribes a lot of market behavior to the woolly-headed, often manic-depressive moods of the investing public, whether they’re Wall Street pros or rec room dilettantes. His latest book narrative, Economics: How Stories Go Viral and Drive Major Economic Events, is well-timed.
His most famous book, 2000’s Irrational Exuberance, warned that the dot-com craze had made the market too frothy. Faddish (and ultimately doomed) stocks in earnings-free high-fliers such as Pets.com were all the rage. And sure enough, the market soon obliged, the bubble popped, and a nasty bear market followed.
In 2003, he authored an academic paper that asked whether the housing market also was getting too crazed. He was early on that score, but the collapse of the sub-prime mortgage field and the subsequent 2008 financial crisis proved him right about the madness of crowds yet again.
“What we have now is really two epidemics. We have an epidemic of the coronavirus, but we also have an epidemic of fear based around a narrative that is not necessarily keeping up with scientific reality,” he said. “And this narrative has been quite striking, It’s a dangerous time for the stock market.”
For Shiller, the current market anxiety will likely persist whether the epidemic gets worse or not. “We’ll see how well the measures to reduce the coronavirus epidemic play out. But I wouldn’t put too much hope in that,” Shiller said. “It’s a dangerous epidemic and the epidemic of fear that accompanies it is dangerous also.”