Social mood drives markets, not administration turmoil

It seems safe to presume that each director of the National Economic Council has brought a different skill set to the job. That skill set, however, does not matter in the least to the trajectory of the stock market.

How can that be? Copious observers have just attributed the Dow’s second-biggest down day of the year to rumors that the NEC’s current director, Gary Cohn, who is also the president’s chief economic advisor, was leaving his post. 

Did the director’s rumored exit cause the market to plunge? Let’s look at the chronology of events and see. 

{mosads}Rumors of the director’s departure circulated in the morning. The Dow gapped down when the market opened, headed lower and then began to rally. At 11:05 a.m., the Dow was down less than 37 hundredths of a percent. By 11:06, news had broken that a White House official confirmed the director would remain in his post. The rally peaked three minutes later, and the Dow dove for the rest of the session, closing down 274 points.

If you believe that news moves the stock market, then you must conclude that it was news that the director would stay that sent stock prices substantially lower, rather than the earlier rumors that he would depart. But that interpretation is untenable because right now the NEC director is one of the administration’s most popular figures with investors. 

What to think? Well, there’s another way to look at it.

Two comprehensive studies — one by Cutler et al. (1989) and the other by Joulin et al. (2008) — have demonstrated that even the biggest news has no reliable effect on the stock market. What’s more, they found that even the market’s biggest moves typically occur on no significant news. The originator of socionomic theory, Robert Prechter, has demonstrated that even knowing about dramatic news ahead of time is of little worth for forecasting the markets.

Financial markets are a product of human psychology, and socionomic theory proposes that the mood of the herd regulates their fluctuations. Leaders and their policies are virtually irrelevant to this dynamic. As Prechter has observed, conservatives credit Ronald Reagan’s policies for the bull market of the 1980s, and liberals credit Franklin Roosevelt’s policies for the market’s recovery in the 1930s. They’re both wrong: Markets recovered naturally, and leaders got the credit. 

John Maynard Keynes was close to the mark when he recognized that waves of optimism and pessimism drive financial markets, but leaders and policymakers are subject to these waves, too. Their actions in the aggregate express social mood rather than regulate it.

Socionomic researchers Kenneth Kim, John Nofsinger, Peter Atwater and Dennis Elam have found that Congress tends to tighten investment regulations near stock market bottoms, when social mood is the most fearful and pessimistic, and to loosen investment regulations near market tops, when social mood is the most confident and optimistic. Social mood is regulating the regulators.

Most people use politics to try to anticipate stock market trends. It rarely works. But the converse often works.

During every presidential campaign, people make claims about which party will be better for the stock market. But our research group examined two centuries’ worth of data and found that election outcomes offer no reliable basis for anticipating the trend of the stock market. On the other hand, we found that the trend of the stock market does offer a reliable basis for anticipating election outcomes.

People argue about what impact war or peace will have on the stock market. But our research has shown that a condition of war or peace offers no reliable basis for anticipating the trend of the stock market. On the other hand, the trend of the stock market offers a reliable basis for anticipating a condition of war or peace. And so on. 

The current NEC director is helping shape the administration’s tax reform agenda. In certain ways, such work is important. Tax reform impacts workers’ take-home pay and how much revenue is available to the federal government to spend. But don’t count on tax-reform proposals — no matter the form they take — to impact the stock market.

For more than three centuries, stock markets have traced out booms and busts regardless of any actions or non-actions by presidents, prime ministers, kings, Fed chairmen, Plunge Protection Teams, Congress, NEC directors or White House economic advisors. If you want to understand the fluctuations in the stock market and in politics, look to waves of social mood. 

Matt Lampert is the director of research at the Socionomics Institute, which attempts to analyze the market by looking at the nation’s social mood. He’s a contributing author to the upcoming book, “Socionomic Causality in Politics.” His work has been featured by Bloomberg, USA Today, CNBC, the Associated Press and other popular news and scholarly publications.

The views expressed by contributors are their own and not the views of The Hill.