Last week was a volatile one for the S&P 500, starting with the worst three-day decline since 2011. Robert Shiller contends that “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.'” He focuses on secular stagnation, “the idea that there is disturbing evidence that the world economy may languish for a very long time, even for generations”:
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. Paul Krugman wrote approvingly about the talk in The New York Times nine days later. Mr. Summers presented his secular-stagnation idea with uncharacteristic diffidence: “This may all be madness and I may not have this right at all.” But his talk seemed to release a thought virus.
And changing the mindset of investors isn’t easy. Clive Crook points out an irony:
The more widely these psychological channels are understood, the harder it is for central banks and other policy-makers to exploit them.
If investors believe that policymakers are doing nothing but attempting to influence their mood, their mood will be more resistant to influence. Quite possibly, that resistance could increase to the point where even consequential changes in policy no longer have consequences. In central banking, as in most things, the secret of success is sincerity: If you can fake that, you’ve got it made.
Ben Casselman, however, recommends ignoring the day to day fluctuations in the market:
Wednesday was the 26th time this year that the Dow rose or fell by at least 1 percent. It happened 24 times in 2013 and 39 times in 2012. In other words, big swings in the market happen dozens of times a year — and usually mean absolutely nothing. Economist Eugene Fama won a Nobel Prize for demonstrating that the stock market is a “random walk” — its short-term moves don’t reveal anything about the long-term trend.
David Leonhardt provides a historical perspective on the stock market. He warns that stocks are currently expensive:
Since 1881, when the Standard & Poor’s 500-stock index has had a price-earnings ratio of at least 24 — just a bit below where it is now — the average return over the next 10 years is negative 3 percent.
By comparison, the average 10-year return over that entire period, regardless of P/E ratio, is 36.3 percent.
There have been times — like the last few years — when stocks are expensive and they continue rising rapidly regardless. So it is not out of the question that stocks will rebound from their recent decline and rise over the next few months or years. More often than not, though, high-priced stocks lead to mediocre returns, at best, over the ensuing decade.
Finally, Danielle Kurtzleben argues that the media pays too much attention to the stock market:
[F]or all the fearful questions about whether a market correction is coming, it’s important to take some perspective: the stock market’s latest oscillations and whatever crashes might be on the way will only directly affect around half of Americans, and their biggest effects will be on the richest people.
Federal Reserve data compiled by CNBC shows that the share of Americans who own stocks has hovered at around 50 percent for 15 years. And of course, not all of those people own the same amount of stock. As with incomes and wealth in general, stock ownership is highly concentrated at the top (and has been for a while), as this chart from the Economic Policy Institute shows. The bottom 80 percent of Americans by wealth only own just over 8 percent of all stock owned by US households.
The Dish 