PANDEMIC PANIC: THE STOCK MARKET REACTION TO COVID-19

UNCERTAINTY IS BIGGEST FACTOR DRIVING VOLATILITY IN GLOBAL MARKETS, SAYS FINANCIAL HISTORIAN GOETZMANN

GOETZMANN: THERE ARE ECHOES OF 1929 STOCK MARKET CRASH BUT REASONS FOR SWINGS DIFFER; THINKS ECONOMY WILL GET BACK ON TRACK

SAYS WE’RE LEARNING HOW TO DEAL WITH SUDDEN HEALTH SHOCKS BUT FUNDAMENTAL INFRASTRUCTURE CHANGES MAY BE NEEDED

The spread of COVID-19 has shaken financial markets and led to layoffs across the country. Nearly 10 million Americans have filed for unemployment in the past two weeks. Stocks have suffered major losses unrivaled since 2008 and the Dow has seen its worst decline since 1987 — the year of the Black Monday stock market crash. Tonight, we put your financial fears into historical perspective while examining the prospects for recovery with financial historian and Yale School of Management professor William Goetzmann.

Aired on April 3, 2020. 

TRANSCRIPT

> WELCOME TO 'METROFOCUS.'

I'M JACK FORD.

OUR NEW REALITY IS A TERM WE HEARD FREQUENTLY NOW TO ATTEMPT TO DESCRIBE THE CONSEQUENCES OF THE CORONAVIRUS PANDEMIC, IN ADDITION TO THE SHOCKING LOSS OF LIFE AND THE RISING RATE OF INFECTION AND ANOTHER INDICATOR OF THAT NEW REALITY AND THE CONSEQUENCES HAS BEEN THE TURMOIL EXPERIENCED BY THE WORLD FINANCIAL MARKETS.

SO, WHAT CAN HISTORY TEACH US ABOUT THE CAUSES OF THIS TURMOIL AND AS IMPORTANT ABOUT THE PROSPECTS FOR RECOVERY.

TAKE A LOOK AT SOME OF THESE ISSUES WE'RE PLEASED BEJOINED BY PROFESSOR WILLIAM GOETZMANN, PROFESSOR AND DIRECTOR OF THE INTERNATIONAL CENTER FOR FINANCE AT THE YALE SCHOOL OF MANAGEMENT WHO HAS DONE EXTENSIVE RESEARCH AND WRITING, IN ADDITION TO OTHER TOPICS, ON WORLD FINANCIAL HISTORY.

SO, PROFESSOR, THANK YOU FOR JOINING US.

THANK YOU FOR HAVING ME.

I WANT TO GET INTO SOME OF THESE PRIOR HISTORICAL EVENTS YOU'VE DONE SO MUCH RESEARCH AND WRITING ON, TO GIVE US A SENSE OF HISTORICAL PERSPECTIVE.

LET ME SET THE STAGE FOR OUR CONVERSATION BY ASKING YOU ABOUT WHAT THE FACTORS HAVE BEEN THAT HAVE BEEN DRIVING THE VOLATILITY WE'RE SEEING CURRENTLY IN THE WORLD.

THE BIGGEST FACTOR IS UNCER UNCERTAINTY.

UNCERTAINTY ABOUT WHAT THE FUTURE PROSPECTS OF THE COMPANIES THAT MAKE UP THE STOCK MARKET MIGHT BE, UNCERTAINTY ABOUT THE FINANCIAL SYSTEM AND HOW ROBUST IT WILL BE, SO IN THE FACE OF ALL OF THAT, THE MARKET IS JUST GOING TO BE FLUCTUATING FOR A WHILE UNTIL IT CAN SORT ITSELF OUT.

I SEE SOME PEOPLE HAVE ATTACHED THE TERM IRRATIONAL BEHAVIOR TO WHAT WE'RE SEEING IN THE MARKET.

IS THAT AN ACCURATE TERM, DO YOU THINK?

I DON'T THINK THE FLUCTUATION NOW IS PARTICULARLY IRRATIONAL BECAUSE I DON'T THINK ANYBODY KNOWS RATIONALLY WHAT THE RIGHT PRICE FOR ALL OF THE STOCKS IN THE STOCK MARKET MIGHT BE RIGHT NOW.

SO I THINK THIS IS RATIONAL UNCERTAINTY THAT HAS JUST GOT TO WAIT UNTIL WE UNDERSTAND MORE ABOUT THE DURATION AND THE EFFECT ON THE ECONOMY OF THE VIRUS.

SO LET ME ASK YOU THEN TO HELP US PUT SOME OF THIS VOLATILITY INTO A HISTORICAL PERSPECTIVE.

BY DOING THAT, WE LOOK BACK AS YOU HAVE DONE SO OFTEN IN YOUR RESEARCH AND WRITING UNTIL WE CAN LEARN FROM OTHER EVENTS.

SO LET ME START OFF, SINCE WE HEAR SO MUCH NOW IN TERMS OF PEOPLE TRYING TO MAKE PARALLELS BETWEEN WHAT WE'RE EXPERIENCING NOW AND THE INFLUENZA EPIDEMIC OF 1918, THE SPANISH FLU, THOUGH HISTORIANS SAID TO US THAT IT IS A MISNOMER, IT DID NOT IN FACT START IN SPAIN, BUT THE TERM HAS CONTINUED TO BE USED FOR 100 YEARS NOW.

LOOKING AT THAT 1918 CRASH, THE WORLD CRASH, EXPLAIN TO US WHAT THE FACTORS WERE THAT DROVE THAT.

WELL, THE FIRST WORLD WAR IS ONE BIG FACTOR.

IT IS KIND OF HARD TO DISENTANGLE THE EFFECT OF THE WAR FROM THE EFFECT OF THE INFLUENZA EPIDEMIC.

THE MARKET SHUT DOWN WHEN THE WAR BEGAN AS A MATTER OF FACT.

IT IS THE LONGEST HIATUS WE EVER HAD, SEVERAL MONTHS WHERE THE STOCK MARKET WAS SHUT AND PART OF THAT HAD TO DO WITH THE UNCERTAINTY ABOUT THE FIRST WORLD WAR ON THE FINANCIAL SYSTEM AROUND THE WORLD.

SO THE SPANISH FLU CAME TOWARDS THE END OF THE FIRST WORLD WAR WHEN AMERICANS WERE GOING OVER IN BOATS TO FIGHT ON THE ALLIED SIDE.

AND SO THERE WAS SO MUCH GOING ON AT THIS TIME, IT WAS REALLY HARD TO FIND SOME KIND OF CLEAR TREND IN THE NEWS THAT WAS DRIVING STOCK MARKET CHANGES.

SO IT IS AN OBVIOUS MODEL BUT IT IS REALLY HARD TO TAKE A BIG LESSON AWAY BECAUSE SO MUCH WAS GOING ON IN THE WORLD AT THE SAME TIME.

AND WHAT ABOUT THE RECOVERY AFTER THAT CRASHES.

DID THAT HAPPEN?

DID IT HAPPEN RAPIDLY?

WAS IT GRADUALLY?

WAS IT SURPRISING YOU AS YOU LOOK BACK AT IT, HOW WOULD YOU CHARACTERIZE IT?

IN THE UNITED STATES THERE WAS DEFINITELY A RECOVERY, 1919, AND THEN STOCK MARKET I THINK WENT UP.

BUT THEN THAT WAS FOLLOWED A YEAR LATER WITH THE BEGINNING OF THE PRETTY SEVERE RECESSION AND IT WAS A GLOBAL RECESSION AS WELL.

SO IT WAS A VERY VOLATILE TIME PERIOD, JUST LIKE IT IS NOW.

A PERIOD OF UNCERTAINTY ABOUT WHAT THE -- HOW THE ECONOMY WOULD ADJUST TO THE POST WAR EXPERIENCE, AND THEN HOW THE -- WHAT OUR RELATIONSHIP WOULD BE LIKE WITH THE REST OF THE -- THE REST OF THE WORLD AFTER THAT.

ANOTHER PERIOD OF TURMOIL IN THE FINANCIAL MARKETS THAT MOST PEOPLE ARE FAMILIAR WITH WOULD BE THE OCTOBER 1929 CRASH.

HOW ABOUT THAT?

HOW ABOUT THE FACTORS LEADING UP TO THAT?

WELL, THAT ONE DEFINITELY HAS ECHOES OF OUR CURRENT VOLATILITY BECAUSE SUDDENLY THE MARKET STARTED TO FLUCTUATE LIKE CRAZY, YOU HAVE SWINGS OF 7% IN A DAY, 12% IN A DAY, LIKE WHAT WE HAD PAST FEW WEEKS.

BUT THE REASONS FOR THE SWINGS THEN ARE DIFFERENT THAN THE VOLATILITY WE HAVE NOW.

THE -- NOBODY REALLY KNOWS EXACTLY WHAT CAUSED THE CRASH IN 1929.

BUT SOME OF IT IS PROBABLY DUE TO FINANCIAL INFRASTRUCTURE, IF YOU WILL, AND SPECULATION, AND THE USE OF STOCK LOANS TO FINANCE THAT SPECULATION.

BUT WE DO KNOW THEN THAT THE FEW YEARS LEADING UP TO IT WERE A PERIOD ALSO OF SPECULATION IN LAND, IN FLORIDA, AND BUILDING A SKYSCRAPER AND SPECULATION IN PROPERTY IN MAJOR CITIES, THE UNITED STATES.

AS WELL AS A PERIOD OF INCREDIBLE TECHNOLOGICAL INNOVATION WHICH RAISES POSSIBILITIES BUT ALSO UNCERTAINTIES AS TO WHAT THE RIGHT PRICES ARE FOR ACCESS.

HOW ABOUT THE RECOVERY FOLLOWING THAT GREAT CRASH OF 1929?

WELL, WE HAD TO WAIT A WHILE FOR SERIOUS RECOVERY.

FOLLOWING THE CRASH, WE WENT INTO THE GREAT DEPRESSION.

AND THERE HAS BEEN MANY DECADE LONG DEBATE ABOUT HOW MUCH THE CRASH MIGHT HAVE CONTRIBUTED TO THE DEPRESSION OR VICE VERSA.

AND SO I DON'T THINK WE REALLY QUITE KNOW THE CONSEQUENCES OF A SHARP DECLINE IN THE STOCK MARKET LIKE WE JUST HAD.

WE'RE STARTING TO FIND SOME EVIDENCE ABOUT HOW THIS CAN CREATE SOME DISJUNCTION IN THE FINANCIAL MARKETS WHEN YOU HAVE GREAT SWINGS IN ASSET VALUES, YOU ALSO HAVE LARGE LOSSES IN GAINS BY FINANCIAL INSTITUTIONS AND INVESTORS.

HOW DISRUPTIVE THAT WILL BE TO THE REAL ECONOMY IS A QUESTION THAT IS ON EVERYBODY'S MINDS RIGHT NOW.

AND HOW ABOUT THE TURMOIL THAT WE EXPERIENCE IN 1987, HOW WOULD YOU CHARACTERIZE THAT AND WHAT ARE THE FACTORS THAT DROVE THAT?

THAT WAS A BREATHTAKING DROP IN ASSET PRICES THAT CAME IN THE FALL OF 1987.

IT WAS -- IT WAS A ONE DAY DROP THAT WAS BIGGER THAN THE CRASH IN 1929.

AND IT SEEMED TO COME AT A TIME WHEN THE ECONOMY WAS SAILING ALONG FAIRLY WELL.

AND WHEN THAT CRASH HAPPENED, I THINK THERE WAS A FEAR THAT MAYBE THIS WOULD KICK OFF A RECESSION LIKE IT DID IN 1929 AND IN FACT IT DIDN'T DO THAT AT ALL.

1987 WAS ACTUALLY A FAIRLY STABLE YEAR FOR THE STOCK MARKET IF YOU JUST SLEPT THROUGH A FEW MONTHS, IT WOULDN'T HAVE SEEMED UNUSUAL TO YOU.

WHAT HAVE YOU -- LET'S COME BACK TO 1987 FOR A SECOND, BUTTON THAT UP IF YOU WOULD, HOW ABOUT THE RECOVERY?

YOU SAY IT WAS DIFFERENT FROM THE OTHER ONES THAT YOU HAD DESCRIBED AND I THINK THE -- AS YOU SAID YOU MIGHT HAVE SLEPT THROUGH IT IF YOU DIDN'T NOTICE IT.

DID IT REQUIRE THE SAME TYPE OF EFFORT TO GENERATE A RECOVERY THAN SOME OF THE OTHER EVENTS HAVE SHOWN US?

WELL, I DON'T RECALL MUCH IN THE WAY OF STIMULUS BY THE GOVERNMENT IN 1987.

I THINK IT WAS VERY MUCH A FINANCIAL CRASH AS OPPOSED TO A BIG ECONOMIC SHOCK LIKE THE ONE WE HAD NOW.

AND SO IT -- IT REQUIRED MUCH LESS IN TERMS OF DEALING WITH HOUSEHOLD FINANCE AND ADDRESSING THE FUNDAMENTAL ECONOMIC ISSUES.

THERE WAS REALLY A QUESTION IN EVERYBODY'S MIND, WHAT CAUGHT THE SUDDEN DECLINE AND SOME OF IT ALSO PROBABLY HAD TO DO WITH THE INTRODUCTION OF COMPUTER TRADING IN THE CAPITAL MARKETS.

AND THE ABILITY TO SUDDENLY SELL MILLIONS AND MILLIONS OF DOLLARS OF STOCK AT THE PUSH OF A BUTTON.

SO THAT'S -- THAT'S ONE OF THE HYPOTHESES ABOUT WHAT CAUSED THAT CRASH, AND THE SOLUTION TO THAT IS MORE LIKELY TO BE CONTROLLED THE WAY THAT SECURITIES ARE TRADED AS OPPOSED TO FROM THE BASIC MACRO ECONOMIC STIMULUS THAT WE'RE TALKING ABOUT NOW.

GENERALLY SPEAKING, LOOKING BACK OVER THESE EVENTS IN THE PAST, WHAT HAVE YOU FOUND THAT HAVE BEEN THE -- THE INFLUENCES ON THE PROBABILITY OF A RECOVERY.

WHAT KIND OF FACTORS HAVE ENTERED INTO THE PROBABILITY OF RECOVERY.

MY FOCUS IS TYPICALLY ON THE FINANCIAL MARKETS THEMSELVES.

AND WHAT WE KNOW THEY'RE NOT DIVORCED FROM THE FUNDAMENTALS OF THE ECONOMIES THAT THEY OPERATE IN.

THE FINANCIAL MARKETS ARE MADE OF PUTTING CAPITAL TO WORK IN THE REAL ECONOMY, AND THEN ALSO OF EXCHANGING THAT CAPITAL IN MARKE MARKETPLACES.

SO, YOU KNOW, THE RECOVERY AND ASSET PRICES IS SOMETHING THAT TYPICALLY HAPPENS BEFORE THE RECOVERY IN THE ECONOMY ITSELF.

THOSE MARKETS ARE PLACES WHERE PEOPLE SPECULATE ABOUT THE FUTURE AND WHETHER OR NOT DIVIDENDS ARE GOING TO BE PAID, WHETHER OR NOT A COMPANY MIGHT GO BANKRUPT IN THE FUTURE AND SO FORM.

SO THEY'RE THE CANARIES IN THE COAL MINE WHEN IT COMES TO BIG FUNDAMENTAL ECONOMIC ISSUES.

LET ME ASK YOU LAST QUESTION HERE, AND IT IS A LOOKING FORWARD QUESTION, BUT WE ALWAYS LOOK FORWARD BASED UPON WHAT HAS HAPPENED IN THE PAST, HISTORY IS OUR GREATEST TEACHER, AS YOU KNOW.

LOOKING AT THE FUNDAMENTALS OF THE ECONOMY PRIOR TO THE PANDEMIC, AND LOOKING AT THE VOLATILITY THAT YOU TALKED ABOUT AND PUTTING SOME OF THIS INTO HISTORICAL PERSPECTIVE FOR US, WHAT CAN YOU SAY ABOUT THE PROSPECTS FOR RECOVERY, ASSUMING AT SOME POINT AND HOPEFULLY SOONER RATHER THAN LATER WE'RE ABLE TO GET THIS PANDEMIC UNDER CONTROL.

WHAT DO YOU THINK THE PROSPECTS OF RECOVERY FOR THE WORLD FINANCIAL MARKETS LOOKS LIKE.

I THINK THE PROSPECTS FOR THE FINANCIAL MARKETS ARE VERY GOOD.

THE -- AS LONG AS WE CAN KEEP THE BASIC INFRASTRUCTURE OF THE MARKETS AND THE HOUSEHOLD ECONOMICS FROM -- FROM HITTING A WALL, BUT THIS -- WE'RE IN A PERIOD WHERE WE NEED TO MAINTAIN THE EXISTING STRUCTURES FOR THE FINANCIAL SYSTEM, SO THEY'LL BE THERE WHEN WE NEED THEM WHEN THE ECONOMY ITSELF BEGINS TO RECOVER.

I THINK THE ECONOMY ITSELF, THE WORLD ECONOMY, I THINK, WAS IN PRETTY GOOD SHAPE.

ALTHOUGH ONE COULD ALWAYS COMPLAIN ABOUT ONE THING OR THE OTHER, IN TRADE WAR AND WHAT HAVE YOU, OVER THE LAST SEVERAL DECADES, THE ECONOMIES AROUND THE GLOBE HAVE BEEN IMPROVE ING AND THEY HAVE BEEN DOING THEIR JOBS FOR INCREASING NUMBER OF PEOPLE AND I THINK THAT WE'LL GET THAT ON THAT TRACK AND WE WILL CERTAINLY HAVE LEARNED A LESSON ABOUT HOW TO DEAL WITH SUDDEN HEALTH SHOCKS LIKE WE'RE DEALING WITH NOW.

THAT MAY REQUIRE A FUNDAMENTAL CHANGE IN SOME OF OUR INFRASTRUCTURE.

WELL, PROFESSOR WILLIAM GOETZMANN FROM THE YALE SCHOOL OF MANAGEMENT, THANK YOU.

THIS HAS BEEN VERY HELPFUL I THINK CERTAINLY FOR OUR VIEWERS TO GET THIS HISTORICAL PERSPECTIVE BECAUSE AS WE SAY WE CAN NEVER KNOW HOW WE MOVE FORWARD WITHOUT KNOWING FIRST WHAT WE HAVE EXPERIENCED IN THE PAST.

SO THIS HAS BEEN VERY HELPFUL.

I HOPE WE CAN GET A CHANCE TO CHAT WITH YOU AGAIN DOWN THE ROAD AS WE'RE CONTINUING TO LOOK AT ALL OF THIS.

THANKS SO MUCH FOR JOINING US.

THANK YOU.

Funders

MetroFocus is made possible by Sue and Edgar Wachenheim III, the Sylvia A. and Simon B. Poyta Programming Endowment to Fight Anti-Semitism, Bernard and Denise Schwartz, Barbara Hope Zuckerberg, Janet Prindle Seidler, Jody and John Arnhold, the Cheryl and Philip Milstein Family, Judy and Josh Weston and the Dr. Robert C. and Tina Sohn Foundation.

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