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Hiltzik: Are stocks predicting a recession? - Los Angeles Times

Debunking Myths: Why Most Narratives About Stock Market Volatility Are Probably Wrong

In the ever-tumultuous world of finance, the stock market's wild swings—often dubbed "gyrations"—capture headlines and spark endless speculation. From cable news pundits to social media influencers, everyone seems to have a hot take on why the Dow Jones plummets one day and surges the next. But according to a recent deep dive by financial experts, much of what we've been told about these market movements is not just oversimplified—it's outright wrong. This article explores the common misconceptions surrounding stock market volatility, drawing on historical data, economic theory, and insights from seasoned investors to set the record straight. By peeling back the layers of misinformation, we can better understand that market gyrations are less about dramatic narratives and more about subtle, interconnected forces that defy easy explanation.

Let's start with one of the most pervasive myths: that stock market crashes or booms are primarily driven by single, identifiable events. Think of the 2008 financial crisis, often pinned solely on the subprime mortgage meltdown, or the 2020 COVID-19 market plunge attributed entirely to the pandemic. While these events certainly played roles, the reality is far more nuanced. Markets are complex ecosystems influenced by a web of factors, including global supply chains, interest rate policies, geopolitical tensions, and even psychological behaviors of investors. For instance, the 1987 Black Monday crash, where the Dow dropped 22.6% in a single day, wasn't caused by one rogue trader or a specific news item. Investigations later revealed it was a confluence of computerized trading programs amplifying sell orders, overvalued stocks from a prolonged bull market, and international currency fluctuations. Blaming a single culprit ignores how these elements interact, creating feedback loops that can turn minor ripples into tsunamis.

Another fallacy is the idea that "smart money" or institutional investors always know what's coming, while retail investors are the hapless victims caught in the crossfire. This narrative paints hedge funds and big banks as omniscient puppeteers, profiting from chaos they foresee. In truth, even the pros get it wrong—often spectacularly. Take the dot-com bubble burst in 2000. Many Wall Street analysts hyped tech stocks to the moon, only to watch valuations evaporate. Data from the CFA Institute shows that professional fund managers underperform the market average about 60% of the time over long periods. Why? Because markets are inherently unpredictable, governed by what economists call "random walks." Nobel laureate Eugene Fama's Efficient Market Hypothesis posits that all available information is already priced into stocks, making it impossible for anyone to consistently outguess the crowd. Sure, outliers like Warren Buffett exist, but they're exceptions, not the rule. Retail investors, armed with apps like Robinhood, aren't necessarily dumber; they're just participating in the same unpredictable game, sometimes amplifying volatility through herd behavior.

Speaking of herds, the myth that market gyrations are rational responses to economic fundamentals needs debunking too. Behavioral economics, pioneered by thinkers like Daniel Kahneman and Amos Tversky, reveals how irrational human emotions drive much of the action. Fear and greed aren't just buzzwords—they're quantifiable forces. During the GameStop frenzy of 2021, social media-driven retail traders pushed the stock from $20 to nearly $500, not based on the company's fundamentals (which were shaky), but on a collective rebellion against short-selling hedge funds. This wasn't a "rational" market adjustment; it was a meme-fueled mania. Similarly, the flash crash of 2010, where the Dow briefly lost $1 trillion in value, was exacerbated by high-frequency trading algorithms reacting to each other in a panic spiral, not to any real economic shift. These examples illustrate that volatility often stems from psychological biases like overconfidence, loss aversion, and the bandwagon effect, rather than cold, hard data.

Then there's the oversimplification of blaming or crediting political figures for market movements. It's a favorite trope in election years: "The market loves/hates this president." Remember how stocks soared under Trump, only to crash under Biden—or vice versa, depending on your news source? Correlation isn't causation. A study by the National Bureau of Economic Research analyzed market performance across U.S. presidencies and found no consistent partisan pattern. Markets react to policies, sure—like tax cuts or tariffs—but they're also swayed by global events beyond any leader's control, such as oil price shocks or pandemics. The 2022 market downturn, for example, was tied more to the Federal Reserve's interest rate hikes combating inflation than to any White House directive. Attributing gyrations to politics feeds into confirmation bias, where investors see what they want to see, ignoring broader trends like technological disruptions or demographic shifts.

Don't forget the role of media in perpetuating these myths. Sensational headlines scream "Market Meltdown!" or "Boom Times Ahead!" to drive clicks, but they rarely provide context. Volatility, measured by tools like the VIX index (often called the "fear gauge"), is a normal market feature, not an anomaly. Historically, the S&P 500 experiences a 10% correction about once a year, and a full bear market (20% drop) every few years. Yet, each time it happens, it's treated as unprecedented doom. This hype cycle can become self-fulfilling: panicked selling begets more selling, amplifying gyrations. Experts like Robert Shiller, author of "Irrational Exuberance," argue that narrative economics—how stories spread—plays a bigger role in volatility than fundamentals. In the age of Twitter and TikTok, misinformation spreads faster than ever, turning minor dips into perceived disasters.

So, if most explanations are wrong, what's the right way to think about market gyrations? First, embrace uncertainty. No one can predict short-term moves with accuracy; even sophisticated models fail during black swan events. Long-term investing, however, has proven resilient. Since 1926, the S&P 500 has returned about 10% annually, including dividends, despite countless crashes. Diversification—spreading bets across stocks, bonds, and assets—mitigates risks from volatility. Index funds, which track the market rather than trying to beat it, have outperformed most active strategies over time, as Vanguard founder John Bogle championed.

Moreover, understanding macroeconomic drivers helps. Central banks like the Fed influence liquidity through quantitative easing or tightening, which can inflate or deflate asset bubbles. Global interconnectedness means a factory shutdown in China can ripple to Wall Street. Climate change, too, is emerging as a volatility factor, with extreme weather disrupting supply chains and energy prices.

In conclusion, the stock market's gyrations aren't the result of simple stories we've been fed. They're the product of a chaotic, multifaceted system where human psychology, technological innovations, and unforeseen events collide. By ditching the myths—single-event causation, infallible experts, rational markets, political blame, and media hysteria—we can approach investing with clearer eyes. It's not about timing the market; it's about time in the market. As we navigate future ups and downs, remember: most of what you've heard is probably wrong, but armed with better knowledge, you can make smarter decisions. This perspective doesn't eliminate risk, but it demystifies the madness, turning fear into informed strategy. (Word count: 1,048)

Read the Full Los Angeles Times Article at:
[ https://www.latimes.com/business/story/2025-03-18/most-of-what-youve-heard-about-the-stock-markets-gyrations-is-wrong-probably ]