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Market is overreacting to trade war 'theater,' Nobel Prize winner Robert Shiller says

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Trade war 'theater' is leading investors in the wrong direction: Robert Shiller

Nobel laureate Robert Shiller sees the U.S-China trade war creating more stock market jolts.

But he suggests it's not because fundamentals are out of whack. Rather, Shiller blames an overreaction to the drama surrounding the negotiations.

"I think of it as theater. We have two strong politicians, Xi and Trump," the Yale University economics professor told "Trading Nation" on Wednesday. "This is a human interest story which bleeds over into the markets."

Since President Donald Trump's series of tweets on May 5 threatening new tariffs, stocks have been on a roller-coaster ride. It hit a climax on Monday when the Dow dropped more than 600 points before rebounding over the next two sessions.

The CBOE Volatility Index is also reflecting the wild swings. It has jumped by more than 33% in the past month.

"We've seen volatility pick up right in response to this crisis," said Shiller. "Volatility once stirred does have some persistence, and it could continue for months."

According to Shiller, it's challenging to estimate the size and scope of the pullbacks because so much of the market activity is being driven by emotions.

"Tariffs can be evaded by shifting flows around. They're not the end of the world," he said. "The market is driven a lot by how investors view what other investors are doing or are likely to do."

Shiller is hopeful there will ultimately be a deal because President Xi Jinping and Trump have an incentive to make one before damaging their respective economies.

"We might see some accord reappearing," Shiller said.

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Market is overreacting to trade war 'theater,' Robert Shiller says