Knives, Walls, And Other Market Metaphors

Narratives can help investors get over their worries. Which ones do we use in the coronavirus era?

- Michael P.Regan

Investors love a good metaphor to explain away what often appear to be unexplainable events in financial markets. So you hear about stocks taking the stairs up and the elevator down to describe how a slow march higher in prices can be followed by a sudden drop. Or “dead-cat bounce” will be offered as a dark explanation for a market that makes a small but ultimately futile rebound after a sharp loss, likening the price chart to the way a cat seems to spring off the ground following a fall from a tree—even though it was killed on impact.

In recent years the metaphor trotted out over and over has been that stocks are “climbing a wall of worry” as investors dismiss threat after threat, be it the European debt crisis, the trade war, or escalating tensions between the U.S. and Iran. Central banks such as the Federal Reserve, entrusted with the power to set interest rates and buy assets, are viewed as the Sherpas who help investors make this climb. The problem at the moment is how to view the potential damage from the novel coronavirus now that the illness is spreading to countries beyond China. Is this just another row of bricks in the wall of worry, just waiting to be scaled by intrepid financial rock climbers? Or are we confronted with an unforeseen layer of razor wire that’s insurmountable, even with the help of the strongest Sherpas?

As silly as they sound, these metaphors shape the narratives that influence markets and economics—a phenomenon catching a lot of interest because of Yale economist Robert Shiller’s latest book,