Investors may want to get used to fear from the coronavirus rocking the market and economy.
According to Nobel-prize winning economist Robert Shiller, the economic and psychological toll from the COVID-19 pandemic could linger for years, especially if states scrap reopening plans due to spikes in new confirmed cases.
“Looks like we might be entering a second phase,” Shiller said this week as the U.S. surpassed 3 million confirmed cases. “There might have to be closures again. It might have a worse psychological response the second time.”
The economist suggested that another wave of cases could make people more cautious and less concerned with keeping “up with the Joneses” going forward. That mindset could result in people taking fewer risks, and could dramatically hurt demand and push more businesses to the brink.
“That might create a different kind of culture that would last for years that you don’t have to show the latest fashions and drive a spanking new car,” Shiller said. “We just learn that you can relax. But that is bad for the economy.”
For the market, Shiller said that he finds investors typically find comfort in familiar patterns that can help them identify and navigate downturns.
“People remember recent price movements, and they expect them to repeat themselves,” Shiller said. “They tell a story.”
But Shiller added that the market is decoupled from the economy, and in the current environment, fiscal and monetary stimulus are actions as a backstop for stocks.
“People could easily think that it’s not essential to the economy, and it will soon be over,” the economist said. “But I think there’s more at work to it than that.”
Shiller added that he’s still concerned about the economic recovery and believes the market is risky now.
“One thing that’s quite striking is the lack of interest in the whole thing until suddenly after the market peaked in February,” Shiller said. “For a while, it looked like people were suddenly scared, and then it came right back up. I think that has something to do with how stories evolve, and the initial story was a Great Depression again.”