2009-05-08

Emotions Driving the Market

As mentioned in the previous post, emotions is the driving force of this stock market rally. The Financial Times just published an article covering the change in rhetoric from Washington:
The sunnier rhetoric of recent weeks marked a sharp shift both from the bleak mood of the fin de regime administration of George W. Bush and from the first weeks of the Obama White House. The outgoing president’s political capital was so low in his final months in office that the mere fact of his public appearances seemed to have a depressing effect on the markets. His secretary of the Treasury, Hank Paulson, enjoyed greater confidence, but he needed to convince lawmakers the situation was dire enough to merit his $700bn Tarp programme.

Likewise, Mr Obama needed the nation to be worried enough about the economy to pass his nearly $800bn stimulus plan. And too much good cheer in the first days of his administration could have wasted one of his most powerful trump cards – the country’s belief that this recession is owned by president number 43, not number 44.

But once the stimulus bill was passed, the White House calculated that, as Mr Obama told the Financial Times, lawmakers and US voters had reached their limits. No new money to rev up the economy or revive the banks would be forthcoming until the president and his team could demonstrate concrete results from the first instalment.

Since then Americans have been hearing a decidedly more optimistic vibe from Washington. It has seemed to work. A Google search for the term “economic recovery” turned up 6,991 references to the term in January and 7,831 in February. In the first week of May the phrase occurred 24,443 times.
Socionomics makes use of Elliot Wave Theory, and its very important to know the position within a larger pattern because there are frequent corrections at vary levels of time. Thus far, the evidence suggests this is a minor correction within a much larger bear market, but it's possible that the low is years away, rather than months.

I believe, however, that irrational optimism and irrational pessimism are required to allow for a truly extreme emotional event of its opposite. For example, the peak of the Nasdaq technology bubble occurred on the heels of Y2K panic. Similarly, if we are going to have a depressionary low, it may require the ginning up of public optimism right before the bottom falls out. If people expect a depression, then it's likely the actual depression will be better than expected and optimism will return. If people expect a recovery, but none comes, they will be devastated.

We do have an example: 1931, "The Tragic Year", chapter 10 of America's Great Depression. Economists and politicians of the era expected an economic recovery, but it was not to be.

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