This past weekend, I drove out to Bethpage State Park, the public golf mecca on Long Island that Robert Moses built during the Great Depression. The park, which has five courses, recently reopened with new safety rules: no carts, no clubhouse amenities, and payments processed in advance by phone. Among the three players I got teamed up with was a local retiree who had returned from Florida just in time for the lockdown. As we social-distanced our way around the Red course, I asked how he was filling his time. He said that he was watching television and trading in the stock market. That sounded dangerous, I ventured, but my playing partner dismissed my concerns. He had faith in the market, he said, and, in any case, he had set aside a fixed sum, to limit his exposure.
The stock market fell for three days in a row to start this week, and Jerome Powell, the chairman of the Federal Reserve, said on Wednesday that there is a growing sense that “the recovery may come more slowly than we would like.” In a Zoom presentation to the Economic Club of New York, on Tuesday, Stanley Druckenmiller, a former hedge-fund manager who now invests his own money, said, “The risk-reward for equity”—that is, stocks—“is maybe as bad as I’ve seen it in my career.” And yet many small investors, like my golfing companion, do not seem fazed by warnings like these. Since the Dow plunged more than ten thousand points in February and March, individual traders have been buying and selling stocks at record rates. On Thursday, E-Trade, the discount brokerage, reported that its daily trading volume in April was more than three times as large as it was in April, 2019. Other discount brokers have reported similar figures. TD Ameritrade said that it did more than three million trades a day in April, compared with eight hundred and seventeen thousand a year earlier.
This trading frenzy is taking place in the context of a price war that has prompted firms such as E-Trade, TD Ameritrade, and Charles Schwab to eliminate commissions for stock purchases and sales, exchange-traded funds, and index options. Since the shutdowns began, many investors have taken advantage of this era of free trades, which began last fall, well before the coronavirus pandemic hit, to exploit what they seem to view as a good money-making opportunity. In March alone, TD Ameritrade added more than four hundred thousand accounts, CNBC’s Maggie Fitzgerald reported earlier this week. Charles Schwab added nearly three hundred thousand accounts.
In rational terms, getting rid of commissions shouldn’t have had a substantial impact. If you invest five thousand dollars in Apple or Tesla, the five or ten dollars you saved in fees won’t have much effect on the ultimate outcome. “How much trading would you have to do for it to make a difference?” Richard Thaler, an economist at the University of Chicago—who was awarded the 2017 Nobel Memorial Prize in Economic Sciences, for his contribution to behavioral economics—said to me on Thursday, when I called and asked him about the surge in online trading. On the other hand, Thaler added, “Free is always appealing. Everybody likes a free lunch, even though my colleagues don’t think they exist.” Having taken a friendly jab at the Chicago disciples of Milton Friedman, Thaler said that nobody really knows what is driving all the stock trading. “It could be that it’s just a lot of people have a lot of time on their hands,” he said. “One friend suggested to me it is replacing gambling. The casinos are closed and there are no sports to bet on.”
For some active traders, this theory does seem to apply. “I like betting on sports,” Dave Portnoy, the founder of Barstool Sports, told Business Insider. “Sports ended, and this was something that was still going that I could do during the day.” After the shutdowns began, Portnoy put three million dollars in an E-Trade account “to play around with.” He’s been busy sharing his exploits with his large Twitter following. (On Friday morning, he reported, “I’m up fifty grand.”) Of course, most investors don’t have the same resources as Portnoy, who made a fortune earlier this year when a big gambling company took a majority stake in his Web site. And many small investors aren’t day-trading. They are simply moving money into exchange-traded funds or blue-chip stocks, some of which are still pretty beaten up, while others, such as Apple and Alphabet, have already made up most of their losses.
The Yale economist Robert Shiller, who shared the 2013 Nobel Prize in Economic Sciences, for his studies of what drives stock prices, suggested to me that investors are responding to a widely shared narrative that says stock prices tend to rebound sharply after a big fall, and that you have to get in early to make the biggest gains. “I hear the term ‘ “V”-shaped’ a lot,” he said. Shiller’s book “Irrational Exuberance,” from 2000, came out just before the dot-com bubble burst, and “Narrative Economics: How Stories Go Viral and Drive Major Economic Events,” from last year, explores what he describes as the power of “contagious popular stories that spread through word of mouth, the news media, and social media.” In standard economic theory, investors are supposed to carefully weigh things like the level of prices, interest rates, and expected profits before they invest. But Shiller told me that “a narrative is often more emotionally compelling and resonant than an argument about valuation or something else.”
After stocks dipped at the end of 2018, and again in the spring of last year, the market did rebound, and quickly reached new highs. This strengthened the “V”-shaped” narrative, Shiller said. So does the widespread belief that the Federal Reserve, through its massive asset purchases, has put a floor under the stock market. “The consensus seems to be, ‘Don’t worry, the Fed has your back,’ ” Druckenmiller said in his presentation. “There’s one problem with that: our analysis says it’s not true.”
Stocks don’t always rebound in a “V” shape. During the last lengthy bear market, which accompanied the Great Recession, stocks prices started falling in September, 2007, and didn’t bottom out until February, 2009, seventeen months later. During the Great Depression, in the nineteen-thirties, the bear market lasted even longer. It began with the Wall Street crash of October, 1929, and lasted until the middle of 1932; by then, the market was down about eighty per cent from its pre-crash peak. Stocks didn’t hit new highs until the nineteen-fifties.
In the current context, that seems like a scary narrative. Shiller told me that he had been thinking about the Great Depression, too. In early 1930, he reminded me, the stock market rallied for a while, much like it is doing now, only to roll over and go into another remorseless decline. “But nobody remembers that,” Shiller said. “The recent past is more resonant.” Some people do study historical episodes, of course. On Tuesday, Scott Minerd, the chief global investment officer at the Wall Street firm Guggenheim Partners, wrote on Twitter, “Stocks have clearly topped the recent uptrend. Now we find out if this is 1930 all over again.”
At the end of this week, stocks ended their three-day losing streak. The Dow Jones Industrial Average jumped nearly four hundred points on Thursday, and on Friday it rose another sixty points. Until we see what happens to the economy in the coming months, we won’t know for sure if the optimism and derring-do that small investors are exhibiting is justified or crazy. A rapid recovery could generate a big rebound in corporate profits, which would be supportive of the stock market. An extended economic slump could decimate earnings for years, which would surely crush stocks.
Shiller said that he “gives some probability” to the optimistic scenario. But he also issued a warning to investors: being in the market at this point is much riskier than it appears, because the ultimate outcome of the pandemic is shrouded in so much uncertainty. “It’s like saying when the next war will be,” he said. “There are too many factors to consider.” For now, at least, many small investors seem happy to ignore these uncertainties and crank up their online trading accounts. They’d be safer sticking to golf.
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