This chapter is from the book
This chapter is from the book
This chapter is from the book
Measuring Mood
So, how does one best measure social mood?
For the U.S. as a whole, economists and many investors tend to look at one or more of the three major consumer mood indices: the Conference Board’s Consumer Confidence Index®, the Thompson Reuters/University of Michigan Index of Consumer Sentiment®, and the Bloomberg Consumer Comfort Index®. Each has its own methodology and subcategories, but if you were to plot one on top of the other, you would see that they form very similar patterns over time. Unfortunately, as they all involve a survey process, they are often a lagging indicator. Of the three, I find the Bloomberg index most useful because it is published weekly, rather than monthly. Still, it too is lagged, as it reflects a four-week rolling average.
Bob Prechter offers that an even better measure of mood than the three major confidence indices, however, is the market itself. With a few minor caveats that I come back to in Chapter 8, “Social Mood and the Markets Today: So Where Are We?,” I agree that the broad market indices (the S&P 500 and the Dow Jones Industrial Average) are the best real-time social mood barometer out there. They rise as our mood improves and fall as our mood deteriorates. Markets are moved by changes in our mood.
I realize for many this runs counter to the cause and effect concept suggested by others that rising markets lift our mood whereas falling markets result in a drop in our mood. As you’ll see in Chapter 2, the ways in which changes in mood affect our preferences and our decision-making processes I believe make it clear that markets are moved by changes in our mood and not the other way around.
Acts of God and Other Exogenous Events
Having suggested that mood changes cause market movements, I’d like to pause to discuss acts of God and other exogenous events that appear to move the markets, in some cases dramatically.
Most investors (and certainly the financial press) lump together everything from hurricanes and tornados to corporate earnings and actions by the Federal Reserve as reasons for market movements up and down. At the risk of splitting hairs too finely, I’d encourage you to consider man-made exogenous events distinct from acts of God. As I hope becomes clear from this book, the decision-making processes behind man-made “events” reflect the same mood as the market itself.
Obviously, there is no human decision-making process behind a tornado, hurricane, earthquake, or other act of God. But there is a decision-making process in our own reaction to natural disasters, and mood plays a huge role in that process.
Looking at the stock market chart of the Dow Jones Industrial Average in 2005 that’s shown in Figure 1.5, it would be very hard to point to Hurricane Katrina. (It occurred in late August.) Then again, on a chart of Japan’s Nikkei index for 2011 (see Figure 1.6), it’s all but impossible to miss the tsunami that occurred in March.
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Figure 1.5. Hurricane Katrina and The Dow Jones Industrial Average in 2005
Source: Yahoo! (chart)/CSI (data). Reproduced with permission of Yahoo! Inc. © 2012 Yahoo! Inc. YAHOO! and the YAHOO! logo are registered trademarks of Yahoo! Inc.
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Figure 1.6. The Japanese Earthquake/Tsunami and the Nikkei 225 in 2011
Source: Yahoo! (chart)/CSI (data). Reproduced with permission of Yahoo! Inc. © 2012 Yahoo! Inc. YAHOO! and the YAHOO! logo are registered trademarks of Yahoo! Inc.
So why is that the case?
In periods of rising mood, as was the case in the U.S. during 2005, our rising confidence enabled us to see past the disaster and see the economic opportunities still ahead. In periods of falling mood, as was the case in Japan during 2011, we saw only the adverse consequences and the uncertainty created by the disaster.
As I noted earlier, markets react differently to near-identical news every day. One day markets rise on positive earnings reports and on another day they fall. The same is true with acts of God and other non-financial events. I have more examples later in the book, the market’s reaction to which I expect will surprise you. As you’ll see, what is logical to us is entirely situational—it depends precisely on the level and direction of our mood (rising or falling) at a given time.