In a recent article for Advisor Perspectives, Nobel laureate Robert Shiller discusses the recent, confoundingly positive performance of the stock market against a backdrop of negative news.

Shiller writes, “At a time when genuine news suggests that equity prices should be tanking, not hitting record highs, explanations based on crowd psychology, the virality of ideas, and the dynamics of narrative epidemics can shed some light.” He submits that investors have limited ability to “evaluate the significance of economic or scientific news” yet these evaluations, as well as reactions to what investors say and do, lead to stock market movements.

“This process of evaluation takes time,” Shiller writes, “which is why stock markets do not respond to news suddenly and completely, as conventional theory would suggest.” He cites three separate “phases of the puzzle” of the coronavirus pandemic reaction by the U.S. market, as follows:

• The 3% rise in the S&P 500 from the beginning of the coronavirus crisis—from January 30 to February 19.
• The 34% drop from February 19 to March 23.
• The 42% uptick from March 23 to early July.

Shiller analyzes each phase, showing how they reveal “a puzzling association with the news, as the lagged market reaction is filtered through investor reactions and stories.”