WASHINGTON (MarketWatch) — The stock market is predisposed to inertia, and more tempted by fear than greed, according to a statistical analysis presented by former Federal Reserve Chairman Alan Greenspan on Tuesday.
Greenspan was speaking at an International Monetary Fund event on statistics, drawing largely from his recent book, The Map and the Territory.
He looked at the daily changes in the SP 500, adjusted for real earnings per share growth, from 1951 to 2013. He found that 67% of the daily price changes occur between -0.7% and 0.7%, versus the 53% that would be expected for a normal distribution.
Also read: MarketWatch QA with Greenspan
He found more evidence of “fear” than “greed” since daily losses of 5% or more significantly outnumber gains of 5% or more.
There’s also a herding effect — the propensity to follow the crowd.
Greenspan also noted that herding and fear-euphoria imbalance were far more prevalent between 2008 and 2013.
“The more decision making that is detached from reality, the more likely it is to be infected by spirits—especially during euphoria-driven bubbles and their subsequent fear-driven demise,” Greenspan said.
The former central bank chief, in the same speech, also addressed the issue of bank capital, and took odds with the idea that more of it would reduce returns on equity and force lenders to significantly retrench. He notes that between 1869 and 1966, net income as a percent of equity capital ranged between 5% and 10%, before drifting higher as commercial bank powers expanded and securitization increased.
If capital requirements were to go higher, loan spreads would either have to increase to restore the rate of return, or there would be less intermediation.
“But that would not be all that undesirable,” he said.
“While all bubbles burst, only those supported by significant leverage are truly economically disruptive. The recession following the dot-com boom is barely visible in GDP data,” he added.