Ritholtz: Stock Market's Wild Mood Swings Can Be Explained by Mr. Spock
Clients, colleagues and even family members keep asking the same question: “Why have stocks decoupled from the economy?” These are not people who obsess over the Federal Reserve’s balance sheet or spend time with the Bureau of Labor Statistic’s birth-death model. They just want to know what's going on in the stock market.
Recently, the gulf between peoples’ daily experiences and the market has never been greater. It is a huge source of confusion. Traders are alternately exuberant and panicked, swinging markets up or down 10% in a day. In March, indexes fell 34% from record highs just a month earlier; despite horrific news about the economic blow from the coronavirus shutdowns, stocks then jumped 44% from those lows. My Bloomberg Opinion colleague John Authers describes it as the “insanity trade.”
No wonder the public thinks Mr. Market is bipolar. The average person doesn't want to hear abstract academic arguments that markets are probabilistic mechanisms, collectively allocating capital by incorporating imperfect information about an inherently unknowable future. These explanation are clearly unsatisfying.
But maybe there is a simple explanation. In short, one shouldn't think about the "stock market." Instead, think of it as the "Spock market."
A short explanation for those who are not familiar with the "Star Trek" TV and film franchise: Mr. Spock is the science officer and second in command aboard the starship U.S.S. Enterprise; his mother was human while his father was a Vulcan, a race that only managed to save itself from violence and war by turning to hyper-rationalism. Spock's human half, of course, is emotional and irrational and his logical side struggles to keep it under control.
Once you think of Mr. Market as Mr. Spock, the raging disconnect between the economy and equity prices becomes easier to grasp. Consider the following points: