Why did not stock markets decline during the Spanish Flu 1918?

Prof Robert Shiller in this Proj Synd article says there are two pandemics at work: Covid 19 and the economic crisis. One would imagine that financial anxiety is a direct result of Covid19 led economic crisis. That is true but financial anxiety on its own can create problems:

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.

Hmm..

He says markets did not decline during the Spanish Flu. Why?Well, most people did not own stocks then and there was limited anxiety:

Observing successive decreases in stock prices creates a powerful feeling of regret for those who have not sold, together with a fear that one might sell at the bottom. This regret and fear prime people’s interest in both pandemic narratives. Where the market goes from there depends on their nature and evolution.

To see this, consider that the stock market in the United States did not crater when, in September-October 1918, the news media first started covering the Spanish flu pandemic that eventually claimed 675,000 US lives (and over fifty million worldwide). Instead, monthly prices in the US market were on an uptrend from September 1918 to July 1919.

Why didn’t the market crash? One likely explanation is that World War I, which was approaching its end after the last major battle, the Second Battle of the Marne, in July-August 1918, crowded out the influenza story, especially after the armistice in November of that year. The war story was likely more contagious than the flu story.

Another reason is that epidemiology was only in its infancy then. Outbreaks were not as forecastable, and the public did not fully believe experts’ advice, with people’s adherence to social-distancing measures “sloppy.” Moreover, it was generally believed that economic crises were banking crises, and there was no banking crisis in the US, where the Federal Reserve System, established just a few years earlier, in 1913, was widely heralded as eliminating that risk.

But perhaps the most important reason the financial narrative was muted during the 1918 influenza epidemic is that far fewer people owned stocks a century ago, and saving for retirement was not the concern it is today, in part because people didn’t live as long and more routinely depended on family if they did.

This time, of course, is different. We see buyers’ panics at local grocery stores, in contrast to 1918, when wartime shortages were regular occurrences. With the Great Recession just behind us, we certainly are well aware of the possibility of major drops in asset prices. Instead of a tragic world war, this time the US is preoccupied with its own political polarization, and there are many angry narratives about the federal government’s mishandling of the crisis.

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.

Interesting as always from Prof Shiller..

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