Story to Tell
If there is something we have discovered during the brief history of this blog it is that the market moves up or down or sideways and stories arise to explain it. Those stories in turn move markets, or so it seems. Or, apparently, people behave that way.
The phenomenon has been part of the parcel known as behavioral economics, which has been a very influential meme in understanding markets in the last decade, and it is a center of interest of a shining light in economics today.
That is chief proponent of behavioral economics and Nobel laureate Robert Shiller. He is an interesting pundit with a generally bemused air. In his 2019 book, Narrative Economics, he discusses something that is so obvious as to be nearly invisible. [The book builds on a paper this Yale Prof wrote in 2017.]
That is: That people seek meaning, and as a herd, arrive at agreed meaning to events that otherwise appear as big and little numbers criss-crossing computer servers and screens. For this purpose they find a story or narrative.
Here Shiller describes what he means by “narrative.”
I use the term narrative to mean a simple story or easily expressed explanation of events that many people want to bring up in conversation or on news or social media because it can be used to stimulate the concerns or emotions of others, and/or because it appears to advance self-interest. To be stimulating, it usually has some human interest either direct or implied. As I (and many others) use the term, a narrative is a gem for conversation, and may take the form of an extraordinary or heroic tale or even a joke. It is not generally a researched story, and may have glaring holes, as in “urban legends.” The form of the narrative varies through time and across tellings, but maintains a core contagious element, in the forms that are successful in spreading. Why an element is contagious, when it may even “go viral,” may be hard to understand, unless we reflect carefully on the reason people like to spread the narrative. Mutations in narratives spring up randomly, just as in organisms in evolutionary biology, and when they are contagious, the mutated narratives generate seemingly unpredictable changes in the economy.
I find Wall Street hard to comprehend. I think my consternation is somewhat understandable just now, as the world economy has stopped ticking, but the financial markets are in high gear forward. I know how news people sit down together to design an issue’s cover, and to put a story together from the jetsam of the day, and that is what mostly strikes me when the Barrons hits my door steps on Saturday morning. They have come up with a story line for something that at heart is resistant to narrative.
The return of the tariff story troubled David Carter, who juxtaposed it with the stimulus narrative in conversation with Reuters reporter.
“Markets had a very strong April as they looked through the valley of economic weakness to a point when stimulus will reignite economic growth,” said David Carter, chief investment officer at Lenox Wealth Advisors in New York.
“Trump poking China was the last thing markets needed given so much present economic and financial uncertainty,” Carter added.
The Wall Street Journal also had the Earnings Story on its mind.
"Major U.S. stock indexes closed lower for the week as a slew of corporate earnings and economic data gave investors a flood of information highlighting the toll of the coronavirus pandemic on the economy," it wrote.
On Friday, the S&P 500 dropped 81.72 points, or 2.8% to 2830.71.
The Dow Jones Industrial Average shed 622.03 points, or 2.6% to 23723.69.
The tech-heavy Nasdaq Composite lost 284.60 points, or 3.2%, to 8604.95, lagging behind its peers after outperforming in recent weeks.
This all happens in the face of efforts in getting the domestic economy back on a strong footing.
“For people that would be considering investing, it was a reality check,” said Don Dale, managing partner at investment firm Equity Risk Control Group.
Mondays are always a reality check. The stories I see driving this Monday upcoming are embodied in Warren Buffet's decision to sell his airlines (4) holdings. He is the avatar of buy and hold. And he is selling here because it will be a 3 to 4 year drought at best for the air. He is a Nebraskan story teller that many people listen to. - B.B.
https://www.reuters.com/article/us-usa-stocks/wall-street-tumbles-as-renewed-tariff-threat-adds-to-uncertainties-idUSKBN22D58W
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