Working Paper: NBER ID: w27272
Authors: Stefano Giglio; Matteo Maggiori; Johannes Stroebel; Stephen Utkus
Abstract: We analyze how investor expectations about economic growth and stock returns changed during the February-March 2020 stock market crash induced by the COVID-19 pandemic, as well as during the subsequent partial stock market recovery. We surveyed retail investors who are clients of Vanguard at three points in time: (i) on February 11-12, around the all-time stock market high, (ii) on March 11-12, after the stock market had collapsed by over 20%, and (iii) on April 16-17, after the market had rallied 25% from its lowest point. Following the crash, the average investor turned more pessimistic about the short-run performance of both the stock market and the real economy. Investors also perceived higher probabilities of both further extreme stock market declines and large declines in short-run real economic activity. In contrast, investor expectations about long-run (10-year) economic and stock market outcomes remained largely unchanged, and, if anything, improved. Disagreement among investors about economic and stock market outcomes also increased substantially following the stock market crash, with the disagreement persisting through the partial market recovery. Those respondents who were the most optimistic in February saw the largest decline in expectations, and sold the most equity. Those respondents who were the most pessimistic in February largely left their portfolios unchanged during and after the crash.
Keywords: Investor Expectations; Stock Market Crash; COVID-19; Economic Growth; Belief Dynamics
JEL Codes: G00; G11; G12; R20
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| average investor expectations regarding short-term stock market performance turned more pessimistic during the crash (G41) | perceived probabilities of extreme declines in stock market performance (G17) |
| average investor expectations regarding economic growth turned more pessimistic during the crash (E32) | perceived probabilities of extreme declines in economic growth (E66) |
| disagreement among investors about economic outcomes increased substantially during the crash (E32) | trading behaviors of optimistic investors (G41) |
| optimists prior to the crash experienced the largest declines in expectations (E32) | sold more equity during the crash (G01) |
| pessimists largely maintained their positions during the crash (G41) | reduced trading activity (G19) |