Stock markets fell last week because of fears of a second waves of the pandemic. So we are told. You can be forgiven for finding this odd. We’ve all been warned for months that such a wave was likely. So why does the market seem to have been surprised by this?
It’s because 'the market' is not a person: Benjamin Graham’s talk of “Mr Market” was a misleading metaphor, at least in this case.
Instead, share prices are emergent: they are the unintended outcome of countless individual trades. And these trades are based not just upon traders’ beliefs about the world, but upon their beliefs about what others believe (and, indeed, about what others believe that others believe, and so on). It would be more accurate to say that shares have fallen not so much because of fears about a second wave, but because traders who had previously thought that others were looking forward to recovery now fear that others will fear a second wave.