AOTW 2016 08 05

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August 5, 2016 7:35 am

The troubling gulf between the social mood and high-flying stocks

John Authers

Brazil’s Olympic win shows the links between the wider social mood and markets

The statue of Christ the Redeemer in Rio is illuminated in green and yellow on Thursday to celebrate the opening of the Olympic games


We need our Olympic truce this year. As global attention focuses on Rio de Janeiro, the quadrennial festival should prove a relief from rising anger, fear and resentment.

This year’s catalogue of ugliness needs little rehearsal. Across the western world, anger over inequality and stagnant living standards is boiling over into support for nationalists and populists. The developing world is no calmer. Renewed authoritarianism has come to China, Russia, and Turkey — where the clampdown follows an attempted military coup — while the Olympic hosts Brazil have lived through riots in the streets and the impeachment of a president.

For all the politics and scandal that frequently attend them, the Olympics offer an escape from the sour social mood. For all the controversies over cheating, the games reliably provide uplifting moments to cheer even the most cynical heart.

They also provide a measure for that mood, and help pose a paradox about the markets. Financial markets, products of the mood in society, are driven by waves of human emotion. Crescendos of optimism tend to mean market tops, while sloughs of despair signal a moment to buy.

In the case of the Olympics, the award of the games to an emerging world city tends to be a sign that a watershed has been reached. Rio is the fourth emerging city to be awarded the games. Like its three predecessors — Mexico in 1968, Seoul in 1988 and Beijing in 2008 — it won the games after a long period of sustained growth. The games recognised that growth. And in every previous case, the Olympiad was the cue for that growth to stall or slow, followed in Korea and Mexico by crises, and in China by what look like desperate measures to avert one.

In this way, the Olympics function like magazine covers. Just as an appearance on Sports Illustrated’s means that an athlete has peaked, or on a business magazine means a stock has topped out, so winning the games signals that the period of growth is “in the price” and it is time for a decline.

In Brazil’s case the hex seems to have applied when it won the games, in October 2009. That was almost the exact top of the Brazilian stock market. Over the seven prior years, Brazil’s Bovespa index had outperformed the FTSE All-World index by more than 300 per cent. In the six-plus years since then, it has underperformed by almost 70 per cent, as commodity prices have turned down, and the inefficiencies in Brazil’s economy have been cruelly revealed. Now the anger among Brazilians suggests catharsis and a market bottom.

But if the relationship between markets and social optimism is working as usual in Brazil, it is out of whack elsewhere, particularly the US. Despite extreme pessimism, anger and fear, US stocks are at all-time highs. How can markets prosper so well, when the mood might seem to signal a buying opportunity born of negativism?

Peter Atwater, who studies the link between moods and market for the consultancy Financial Insyghts, suggests two answers. One is that the financial world has become hermetically sealed off from the real one. Central banks’ monetary policies should, as intended, push up asset prices — and markets are rallying on that ineffable mathematics. By making the rich richer without much helping those without access to credit or investments, this stokes the anger even further.

Another explanation is that markets have grown out of sync in the past, and have done so again. In the US, there are many similarities between the current juncture and the late 1960s. Now, as then, there is dissension over race, street riots, and a presidential race likely to be won by a widely distrusted veteran politician (for Richard Nixon, read Hillary Clinton).

In that epoch, consumer confidence, as measured by the long-running University of Michigan survey, peaked in 1966, and started a long decline. Meanwhile, the market also made a top in 1966, but made another two higher peaks before finally falling away amid Watergate and the oil embargo in 1973. This is not a reassuring parallel.

However, if that parallel is to work, we need to explain how markets have stayed in levitation so much longer this time. Mr Atwater suggests that 2000 was such an extreme peak for confidence, when Americans thought history had ended, and that there was a new economic paradigm, that it has taken a long time to work out. The Michigan index has been falling since then, with its latest rally ending more than a year ago.

That comedown from an extreme is reflected by manic behaviour, both in financial markets and in society as a whole. Even in the crazed atmosphere of the late 1960s, nobody quite like Donald Trump was ever nominated for president, while nothing in financial markets touched the extremes of the last 16 years.

Neither explanation for the dislocation of markets from social mood is encouraging. In either case, a realignment will be necessary. While it would be nice if that could happen via reigniting the western economy and re-energizing the populace, the risk remains of a denouement in which markets plumb the depths of social disquiet.

So it is best to take advantage of the truce, and bask with Brazil in the glory of the Olympics.

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