What do baseball, the stock market and a $1,000 bagel rocking a schmear of truffle cream cheese have in common? Plenty, if you agree that society’s mood regulates trends.
Right now, the mood is exceedingly optimistic — precisely at the point when negative trends start to show. So says Alan Hall, senior analyst at the Socionomics Institute, a think tank focusing on using social mood to anticipate trends. Socionomics sees financial market indexes as indicators of changes in society’s optimism and pessimism.
Indeed, baseball’s performance aligns with social mood too, argues Hall, who created the SWAT index tracking major league home runs and strikeouts against the U.S. stock market for the past 147 years.
He found that, as a reflection of social mood, the performance of both has been in sync for that entire period. Year 2017 was record-setting for home runs and strikeouts, as well as for the stock market. Both phenomena reflect the confidence to take risks.
The same correlation occurred in 2008, when the market peaked.
So what’s the upshot? Alas, the current highly positive social mood is about to turn since indicators show that an extreme in optimism is near.
For example, the last time that outrageously priced, lavish if not delish, bagel was sold in New York was 2007, when the social mood was also exceedingly positive.
ThinkAdvisor interviewed Hall, 62, by phone. A contributor to the new book, “Socionomic Studies of Society and Culture” (Socionomics Institute Press Oct. 2017), he has lectured in the U.S. and Europe, and advised the U.S. military on how social mood data can warn of epidemics. Socionomics Institute, based in Gainesville, Georgia, is affiliated with Elliott Wave International, which focuses on technical market analysis based on the Elliott Wave principle that markets unfold in a fractal pattern. Here are excerpts from our interview:
THINKADVISOR: This year, a number of baseball records have been set — grand slam home runs in a single season, single-month home runs. It’s also been a record-setting year for the Dow Jones industrial average. You see a connection there?
ALAN HALL: Both are reflecting an underlying cause: social mood, people’s shared psychology. This same [association] occurred in 2008, which was another important peak in the stock market, or as we call it, a positive extreme in the trend of social mood. In baseball, the performance of both offense and defense have improved, and so has the stock market.
So you added strike-outs to the home run data?
Yes, and the correlation was even stronger. Strikeouts have also spiked to record rates. It’s stunning. In fact, this year pitchers threw more “immaculate innings” than ever before: striking out a side on nine consecutive pitches. The increased tendency to swing for home runs comes with an additional likelihood that one will miss.
Does your SWAT index reflect performance team by team?
No. It’s reflected by the sum total performance of all the teams — aggregate performance. Individual players’ lifetime stats have an age-related arc that doesn’t fit the stock market. And an individual investor’s performance probably wouldn’t fit, either.
But baseball players and investors make many individual decisions. How does social mood come into play?
It’s true that most hitters and pitchers don’t check the stock tickers before they perform, and most stock investors don’t check baseball stats before buying and selling. Neither of them influences the other. But there’s an underlying factor driving both those things. Both performance metrics and risk-taking metrics — swinging for the fences and buying stocks — reflect positive social mood, optimism about the future and confidence to take a risk.
What generates that optimism?
We pick it up from all the people around us and tend to trend toward the extremes. Then it becomes time to change direction. [But] sometimes you pick up directional “head fakes” [feigning].
So when baseball players catch the positive social mood, it shows up in home runs?
All of us [feel positive and negative social moods]. With the housing bubble, the dot-com bubble and the stock market in 2007, everybody had positive social mood trends — tremendous confidence about the future. They extrapolated that trend indefinitely. People do this most strongly at turning points.
Is the current trend about to turn?
Yes. We’re starting to notice more and more things that indicate we’re approaching an extreme in the social mood trend. For example, a $1,000 bagel [truffle cream cheese, wine jelly, gold-leaf flakes] is back being sold in New York [Westin Times Square hotel].The last time that happened was in 2007. This means the mood is extremely positive, and it’s from these positive extremes that negative trends begin.
Why is the social mood so positive now?
Social mood derives [from within] us and from our social interactions with one another. It comes from the growth and decline of many things. It trends on its own schedule and is part of the herding process. Nothing affects it. Nobody is in control of it. It moves along at its own pace.
Are we conscious of having a positive or negative social mood?
We may be conscious of feeling optimistic, but we don’t know why. So we seek rationale and are likely to seize on things that people around us are grabbing hold of, too. When everybody is most convinced that they’re right and there are extremes in the social mood trend, that means the trend is about to turn, as I’ve said. It’s why “shoeshine boys” plunge into the stock market at the peaks and people sell all their stocks at the bottoms. Emotions run really high, and the rationale is that everything is going to continue in that direction. People just can’t argue themselves out of it.
The Institute’s website says that events don’t upset the stock market. That’s a surprising statement.
The year 2017 is one of the worst years for disasters, yet the stock market is at an all-time high. It just shrugged off those things because events aren’t affecting the social mood.
But don’t investors have expectations that certain events will affect the market and factor those into their investment decisions?
Investors in stocks are making decisions under conditions of extreme uncertainty because they have no rational basis to value the stocks they’re buying. They only have expectations based on what they think other people might pay for that stock in the future.
What does that cause investors to do?
Under extreme uncertainty, people are most prone to default to the herding instinct: “I don’t know what’s going on. Maybe somebody else does.” This is an age-old survival tactic that conferred survival advantage in the natural world, but it doesn’t help that much in the stock market. It can really hurt you.
Is the herd mentality evident now?
People are herding all the time. Most people associate herding with market crashes, but people herd on the way up too. Even antelopes quietly drinking at a pond are herding — watching each other closely for cues as to signs of danger on the horizon, or lack of it.
About baseball and the market: What would happen if the Dow plummets? Would there be a big drop in home runs too?
If the Dow goes into a sustained downturn for a year or two, we would expect to see a reflection of that in the SWAT index — fewer home runs and fewer strikeouts. We saw exactly that in 1987, when the SWAT index peaked, and there was no new high until about 1993 or 1994.
Does the SWAT index take into account people’s mood and concern about President Trump?
Our theory doesn’t use Trump as a cause of anything. Trump is a result [of U.S. pre-election negative mood]. It’s part of what helped him into office.
But now there’s anxiety about what he could and would do.
Yep, there is. We have a metric that reflects that: the Dow Jones industrial average value in ounces of gold. It’s the underlying negative mood reflected by Dow gold. The all-time high was in 2000, and then a low came in 2009. It’s been rallying some since, but it’s nowhere near the levels of 2000.
Why do you use that metric?
It’s a better reflection of what the average guy’s economic experience is. Many [are] out of work, and people are having trouble adapting to other cultural changes.
What’s the probability that Trump will be impeached?
Not much likelihood. But looking at the records of what happened to Richard Nixon and a lot of other “Teflon” politicians that have gotten free passes — everybody loves them when the mood is positive; but when it’s negative, everybody hates them — we’ve seen their popularity swing with the stock market. Now the mood trend is up, and everyone is willing to tolerate the considerable problems that Trump poses.
What about the move to start a Trump impeachment?
It’s not getting any traction. However, if we get a sustained down trend in the markets for, say, a year, you’re going to see a lot more discontented people, the social mood will turn down and the impeachment movement will get a lot more traction. Trump is going to get angry, along with everybody else; and the whole thing will become more of a show than it is now.
You’ve conducted an in-depth study on authoritarianism that looked at the big trends toward negative social mood and authoritarianism. Can you apply that to the way President Trump is governing?
History’s largest episodes of authoritarianism both here and in other countries were preceded by big down trends toward negative social mood and down trends in the stock market.The major driver of down trends in the stock market is fear — fear about the future, lack of confidence about the future, pessimism. That’s the same psychological fuel that drives some individuals to be an authoritarian.
But what about Trump?
That fuel is also the willingness of all individuals to submit to authoritarians and seek a powerful leader, and to do the kinds of things we’re doing right now in terms of dismissing the value of democracy.
Let’s return to baseball: Can you predict who’ll win this year’s World Series?
The effects of social mood manifest most clearly in aggregate performance — total performance in both leagues all year. The effects are less clear in individual teams or player statistics. So the World Series isn’t included in data for our study. The next load of data I’ll get will start next season.
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