Predicting the stock market at a time like this is hard. To do so well, we would have to predict the direct effects on the economy of the COVID-19 pandemic, as well as all the real and psychological effects of the pandemic of financial anxiety. The two are different, but inseparable.
NEW HAVEN – We are feeling the anxiety effects of not one pandemic but two. First, there is the COVID-19 pandemic, which makes us anxious because we, or people we love, anywhere in the world, might soon become gravely ill and even die. And, second, there is a pandemic of anxiety about the economic consequences of the first.
These two pandemics are interrelated, but are not the same phenomenon. In the second pandemic, stories of fear have gone so viral that we often think of them constantly. The stock market has been dropping like a rock, apparently in response to stories of COVID-19 depleting our lifetime saving unless we take some action. But, unlike COVID-19 itself, the source of our anxiety is that we are unsure what action to take.
It is not good news when two pandemics are at work simultaneously. One can feed the other. Business closures, soaring unemployment, and loss of income fuel financial anxiety, which may, in turn, deter people, desperate for work, from taking adequate precautions against the spread of the disease.
Moreover, it is not good news when two contagions are, indeed, global pandemics. When a drop in demand is confined to one country, the loss is partially spread abroad, while demand for the country’s exports is not diminished much. But this time, that natural safety valve won’t work, because the recession threatens nearly all countries.
Many people seem to assume that the financial anxiety is nothing more than a direct byproduct of the COVID-19 crisis – a perfectly logical reaction to the disease pandemic. But anxiety is not perfectly logical. The pandemic of financial anxiety, spreading through panicked reaction to price drops and changing narratives, has a life of its own.
The effects financial anxiety has on the stock market may be mediated by a phenomenon that psychologist Paul Slovic of the University of Oregon and his colleagues call the “affect heuristic.” When people are emotionally upset because of a tragic event, they react with fear even in circumstances where there is no reason to fear.
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