On Oct. 19, 1987, Black Monday, stock prices plunged, with the Dow Jones industrial average falling 22.6 percent in a day. Many commentators rushed to explain what triggered the crash — a response to some political event, some piece of economic data or whatever.
But the economist Robert J. Shiller managed to get a questionnaire out to many market participants as the crash was in progress and found that essentially nobody selling stocks explained their actions as a response to news. Instead, more or less the only important reason given for selling stocks was that … their prices were falling. In other words, the stock plunge looked like a panic that fed on itself.
Shiller later won a Nobel Prize for his work on market irrationality — a prize he shared with Eugene Fama, who is famous for his theory that financial markets are extremely rational and efficient. Don’t let anyone tell you that the Swedes lack a sense of humor.
I’m dating myself here, but I often think about Shiller’s work when markets go wild, as they have the past few days.
Markets plunged Monday, although as I write this, they seem to be bouncing back; U.S. stock prices are still way up on the year and, for that matter, since President Biden took office in 2021. Anyway, everywhere I look, it seems that I see headlines to the effect that stocks plunged on fears of a U.S. recession — with this interpretation stated as a fact, not a guess or something some economists say.
The truth, however, is that we don’t know why stocks fell. Concerns about a possible recession have certainly risen; I wrote about those concerns in my latest column. But what was true in 1987 was almost surely true in 2024, too: Most people selling stocks and other assets weren’t engaging in macroeconomic analysis; they were selling because prices were falling. It’s hard to be sure what triggered the sell-off, but it’s also not very important: Market panics can happen for many reasons, and what matters is how long they persist and whether they have serious side effects.
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