On Oct. 19, 1987, Black Monday, stock prices plunged, with the Dow Jones industrial average falling 22.6% in a day. Many commentators rushed to explain what triggered the crash — a response to some political event, some piece of economic data or whatever.
But economist Robert J. Shiller managed to get a questionnaire out to many market participants as the crash was in progress and found that essentially nobody selling stocks explained their actions as a response to news. Instead, more or less the only important reason given for selling stocks was that … their prices were falling. In other words, the stock plunge looked like a panic that fed on itself.
Shiller later won a Nobel Prize for his work on market irrationality — a prize he shared with Eugene Fama, who is famous for his theory that financial markets are extremely rational and efficient. Don’t let anyone tell you that the Swedes lack a sense of humor.
I’m dating myself here, but I often think about Shiller’s work when markets go wild, as they have the past few days.
Markets plunged Monday, although as I write this, they seem to be bouncing back; U.S. stock prices are still way up on the year and, for that matter, since President Joe Biden took office in 2021. Anyway, everywhere I look, it seems that I see headlines to the effect that stocks plunged on fears of a U.S. recession — with this interpretation stated as a fact, not a guess or something some economists say.
The truth, however, is that we don’t know why stocks fell. Concerns about a possible recession have certainly risen; I wrote about those concerns in my latest column. But what was true in 1987 was almost surely true in 2024, too: Most people selling stocks and other assets weren’t engaging in macroeconomic analysis; they were selling because prices were falling. It’s hard to be sure what triggered the sell-off, but it’s also not very important: Market panics can happen for many reasons, and what matters is how long they persist and whether they have serious side effects.
Still, let’s ask the question: Did recession fears set off this market plunge? The more you look at the facts, in particular which prices plunged, the less sense this story makes.
Of the percentage change in prices of selected assets and asset classes between their peak last week and their low point Monday, the SandP 500, which basically includes all large U.S. corporations, is where you’d most expect recession fears to manifest; after all, a recession would adversely affect corporate profits. And the SandP 500 did fall. But even that is confusing. You see, while expected profits have no doubt fallen, so have interest rates. And with other things being equal, lower interest rates should boost stock prices. The overall effect can go either way. So the decline in broad stock indexes is a bit of a puzzle.
Furthermore, if fears of a U.S. recession drove this stock slump, why did Japanese stocks fall so much more than stocks here? In fact, the global stock slump began in Japan, which is still a major economy — and one in which, thanks to time zones, markets are out of sync with markets in the United States.
Back to U.S. stocks: The biggest loser among major players was Nvidia, which makes chips used in artificial intelligence (or, more accurately, the pattern-recognition and summarizing software we’ve been calling AI). AI-related companies and their stocks have been on a huge run, but there’s a growing sense, at least as far as I can tell, that they have been overhyped. As one source put it, “Concerns about it being a bubble arise from the hype surrounding unproven AI applications and massive investments driving unrealistic expectations.” Who said that? AI, of course — specifically, Bing’s Copilot.
So maybe this isn’t about recession fears, after all; it’s about fears that AI is another dot-com bubble, that Nvidia is becoming the next Pets.com. (Dating myself again.)
I’ve included two other assets not because they’re economically important but because I think they’re revealing.
One is gold, often regarded as a safe place to park your wealth. That role is way overstated, but in this case, at least, the metal lived up to its reputation, not losing much value in the crash. But I include it mainly as a point of comparison for the other asset, bitcoin, whose price plunged more or less in line with tech stocks.
It’s really hard to reconcile a falling price for bitcoin with the story that this is all about recession fears. Stocks ultimately derive their value from expected future profits, which will be hurt if we have a recession. Bitcoin ultimately derives its value from … well, nothing in particular. But one of the better arguments for bitcoin, despite its failure to replace conventional currency as a means of payment, is that it is becoming a form of digital gold, an asset people hold because they consider it a refuge in hard times.
I have problems with this view. We may indeed be heading for a “Mad Max” dystopia, but if we are, do you think we’ll still have a working internet? But never mind. The point for now is that during the recent turmoil, bitcoin has behaved not so much like gold and a whole lot like Nvidia. As Bloomberg’s Joe Weisenthal put it, “Bitcoin doesn’t look like the new gold. It looks like three tech stocks in a trench coat.”
So what caused the stock sell-off? I don’t know. What I do know is that nobody else knows, either. And it probably doesn’t matter much, unless this sell-off has major effects on the real economy.
Which brings me back to that 1987 crash.
U.S. economic growth in the near future probably won’t be as robust as it was after Black Monday, since there’s a lot of evidence that the economy is slowing down for reasons unrelated to the stock market. But the crazy market action of the past few days was probably sound and fury, signifying not much.
Paul Krugman is an American economist who is the Distinguished Professor of Economics at the Graduate Center of the City University of New York. Krugman was previously a professor of economics at MIT, and, later, at Princeton University. He was honored with the 2008 Nobel Prize in economics.
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