We know COVID cases are rising – hitting all-time highs in the US this past weekend. We know that cases could possibly continue to rise through the winter. Currently, we do not know how much state and local governments and going to lock down as a reaction and how much more regular consumers will limit their behavior as a result of this accelerating third wave. But surely the facts on the ground today were wholly predictable.
At the time of writing this blog post – midday on October 26th – we’re looking at the Dow Jones down around 900+ points. We’ve seen oil contracts (which we’ve already posited as a proxy for coronavirus activity) fall 2.5% in the previous week. For some strange reason, only now are investors starting to feel queasy about the rising case load. Our question: why is this a surprise? Why is the market reacting badly to this now? Every expert in the world was telling us that cases get worse in the winter, so why are investors reacting poorly to these changes? Nothing unexpected has happened.
In theory, the securities markets are supposed to be perfectly rational, perfectly efficient, and forward looking. Today stands as evidence that the markets, while tending towards rationality in the long term, are still run by everyday people who are prone to mistakes, naivety, overreaching optimism and pessimism, and irrationality.