economics
business
coronavirus
Does Covid-19 Prove the Stock Market Is Inefficient?
Economics, 2013 Nobel Prize
Economics, Princeton University
0
0
Genesis
Response
Penultimate
Finale
May 3rd, 2020
Burt’s concluding line is “If there’s nothing investors can exploit in a systematic way, then it’s very hard to say that information is not being properly incorporated into stock prices and that our stock markets are not remarkably efficient.” I wonder what he means by “systematic.” How do we be systematic in assessing whether the coronavirus epidemic will cause a serious disruption of business? We have never seen such a massive epidemic-inspired worldwide shutdown of business. Nor have we ever seen the sudden demand to facilitate social distancing, which threatens to upend many business models.
I don’t think he is saying we should not use our judgment, our intelligence, our general knowledge, to try to consider what the new world situation means. In fact, good judgment matters. Economists Judith Chevalier and Glenn Ellison have shown that managers who had MBA degrees in fact earned return 0.63% a year more. That means 21% more total over thirty years. That’s something, though one has to ask if this is the best use of their education and intelligence.
Even in the case of the Covid-19 stock market, the advantage to being alert to the epidemic may have been small, so far at least. The S&P 500, after rebounding, as of April 30, is down only 14% from its peak in February. As of April 30, we are just back to the stock market level of last September. No disaster yet. And maybe we weren’t all that wrong in our allocation of attention February 19. We naturally focused more on implications for the health and welfare of our families. We were starting February 19 to shop to stock up, hearing in the news many stories from Asia of panic buying, of emptying of stores of food, hand sanitizer, toilet paper and other essentials. If instead we really all made a serious effort right then to think through the implications of the epidemic on the market, we might have brought the price down right then. But of course we didn’t.
Most institutional investors apparently didn’t either. Professionals cannot just abandon the strategy they have promised their clients just because they “think” that the epidemic would hurt business.
It does not appear that it is impossible to beat the market somewhat. I have been saying that the efficient markets theory, and the random walk theory are half-truths. Burt says almost the same thing in his 12th edition, which now includes a chapter on behavioral finance. He paraphrases Mark Twain: “I conclude that reports of the death of efficient markets hypothesis are vastly exaggerated.” Not wrong, just exaggerated.
How do Burt and I differ? I am not sure. I am apparently more likely to advise people to take a look at their portfolio right now, and to consider lightening up a little on risky or stick-in-the-mud holdings, if they haven’t already. The coronavirus pandemic remains a time of fundamental change, it is far from over, and let’s not forget that.
0 Comments
Follow Us
