Why is the stock market rising when the economy is falling?
Conventional wisdom tells us that when the economy is expanding, the stock market should also go up because higher spending means higher earnings, which lead to higher stock prices.
And when the economy is contracting, the stock market must also fall because as people are not spending enough, lower sales leads to lower earnings growth.
Last year, during the coronavirus crisis, the economy fell to its lowest in history. Businesses were closing down, people were losing their jobs and yet, the stock market was recovering very fast.
Such disconnect between stock prices and the reality on the ground can be explained by the theory of Socionomics, which was popularized by Elliott Wave guru, Robert Prechter in the 1980s.
According to this theory, it is the subconscious sentiment of the public, or social mood, that causes market events to happen, not the other way around.
For example, two weeks ago, we received the news that our gross domestic product suffered the worst postwar contraction of 9.5 percent last year.
If this negative economic event caused the market to panic, the Philippine Stock Exchange Index (PSEi) would have dropped significantly, but because market mood was optimistic, the index quickly recovered and resumed its uptrend.
We also received last week the news that inflation rate for January has accelerated to 4.2 percent, which disappointed many analysts’ expectations.
If we follow common market notion, this piece of bad news should have caused the market to fall, but because of the prevailing positive social mood in the market, the PSEi instead went up by 100 points.
If social mood is fearful, no amount of good news can make the stock market to go up because anxious investors will be driven by fear to dump stocks.
In the same way, if social mood is optimistic, no bad news can influence the market to go down because hopeful investors will look beyond the negative for greater gains.
Previously, we discussed in this column that trends in pop culture can show changes in social mood as people express their mood in their choice of music, movies and TV shows. When people watch happy movies and listen to upbeat music, a positive social mood can develop that can lead to a rising stock market, but when people watch more drama shows and listen to slow-tempo songs, social mood can turn to negative that causes stock market to fall.
At the height of the lockdown last year, the top shows people watched at Netflix were Korean melodrama series “It’s Okay to Not Be Okay” and “The World of the Married.”
People also watched horror movies such as “Train to Busan” “Ghost Ship,” “Pandemic,” “The First Purge,” “Metamorphosis” and “Alive” that dominated the weekly charts.
During this period, the negative social mood increased and caused the PSEi to fall gradually from its high in June toward the end of October.
But few weeks before the government lifted restrictions on the lockdown, social mood began to show signs of improvement.
People started watching positive and happy movies, such as “Crazy Rich Asians,” “Enola Holmes,” “The SpongeBob Movie,” and the Korean TV series, “Start-Up.”
The change in social mood to positive caused the stock market to rally strongly in November and ended the year above 7,000 level.
Today, social mood continues to be positive with romantic comedy and fantasy shows contributing more than half of the top 10 most watched shows at Netflix.
In pop music, on the other hand, the most streamed song at Spotify last year was a local song called “Imahe,” which is not really a happy song but has better upbeat than the slow-tempo songs in 2019.
With positive social mood rising, people are also starting to listen to happier songs. Seven of the top 10 songs at Spotify today are upbeat music such as “Dance with You,” “Panalo” and “Dynamite.”
Although the return normalcy is still far away, a positive social mood should help us forge our path to full recovery.
Remember, it is not a recovering economy that makes happy people. It is the happy people that makes economy recover. INQ
Henry Ong is a registered financial planner of RFP Philippines. Stock data and tools provided by First Metro Securities.
To learn more about investment planning, attend 88th batch of RFP Program this March 2021. To register, e-mail [email protected] or text at 0917-6248110
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