Sunday, June 5, 2011

Stocks and Sex: A Socionomic View of Demographic Trends

An oldie (1999) but goodie from Robert Prechter via Socionomics Institute:

Most people think that the economy is a key determinant of stock market behavior. Pages 260 through 264 of The Wave Principle of Human Social Behavior and the New Science of Socionomics demonstrate that actually, social mood trends, as reflected by the trends of the stock market, determine the direction of economic activity. Most people think that politics affect the stock market. Pages 272 through 282 in the book show that the social moods, as reflected by the stock market, controls the selection of leaders and therefore the direction and outcome of politics. Most people think that peace and war mightily affect the valuation of stocks. Pages 265 through 270 show that aggregate mood trends, as reflected by stock prices, determine social climates that are conducive to peace or war. The fundamental observation of the new science of socionomics is that social mood, which is patterned according to the Wave Principle, is the generator of social action, be it economic, political or cultural. The key insight of socionomics is that the direction of causality between social mood and social action is precisely the opposite of that which is almost universally presumed; the former dictates the character of the latter, not vice versa.

Most people who attempt to relate demographics to the stock market operate under the standard presumption that, if there is any relationship at all, demographic changes (like changes in politics, economics, cultural events, and so on) would be causal to the trends of the stock market. In reviewing related studies, one finds full agreement on that starting point and utter disagreement thereafter. Of course, in any instance when there is a paucity of data and a researcher has the option of sliding two series around until he finds a fit, it is quite easy to find confluence somewhere.2 With respect to demographics and the stock market, one study, based on a cycle theory, postulates a 20-year lag in the stock market’s reaction to the number of births.3 Another, based on the hypothesis that people in their forties spend and invest more than those in other age groups, shows a 44-to-49-year lag between birth rates and stock price trends from 1956 to the present.4,5 Another researcher disputes this claim, pointing out that the number of 44-to-49-year olds “kept rising right through the 1929[-1932] crash, [which] calls the reliability of the ‘spending wave’ as a stock market indicator into question.” To improve the correlation, he constructs a five-year moving average of the rate of change of a “saver/spender ratio” (in this case, the number of 40-to-49-year-olds divided by the number of 25-to-34-year-olds) that correlates with broad stock trends in the U.S. and Japan since 1948 and 1965 respectively, but not well beforehand.6 At least three studies, including one from academia, argue that there is too little data, too little cross-cultural correspondence and far too much divergence in pre-1956 data to suggest any relationship at all between the stock market and lagged birth trends.7,8,9 It is clear from the disagreement among the proponent studies and the statistical analysis in the opponent studies that there is in fact, as the latter conclude, little or no basis for proposing that there is a causal relationship between demographic trends and later stock market trends. However, that is as far as these studies go, because social researchers cannot imagine a basis for investigating any other correlation.

What all of these studies have in common, despite their wide differences, is the presumption that if there is any causality at all, it is demographics that would be causal to the stock markets trends. This stance reflects the standard misconception of causality, i.e., the idea that social mood, and therefore the stock market, is a slave to “outside” influences. The socionomist understands that this view with respect to demographics, as with every other major social phenomenon, is precisely backwards; the premise is false. Naturally, this false presumption has led, as it has with studies relating stocks to economic or political causation, to utter chaos in the aggregated conclusions, as the wide disagreements catalogued above reveal.

How may we state the correct premise for the purposes of testing its validity? We must start from the socionomic perspective on social causality. We know that social mood, as reflected by the stock market, determines the expansions and contractions in the economy. We know that extremes in social mood, as reflected by extremes the stock market, determine whether a landslide election will favor the incumbent or the challenger. We know that the direction and extent of social mood change, as reflected by the stock market, determine the extent of peace or whether there is a social mindset conducive to the outbreak of war. Is it possible to imagine that social mood also determines demographics? Most people would never pose such a question; I hope to suggest an answer.

Figure 1 shows stock market prices plotted against birth rates from 1909 to the present. The data is shown with no lag. The first thing to notice is that there is a fairly noticeable correlation between the two sets of data.
Why would births and the stock market trend together, if they do at all? Sometimes answers can be found in subtleties. Notice that the deepest low in births this century came in 1933, the year after the deepest low in the stock market this century. Notice that the second most important low in births occurred again in 1975, one year after the second most important stock market low of this century. Why would there be a one-year lag? Well, can you think of any activity that always precedes a birth by about a year? If so, could this activity be correlated directly with people’s moods and therefore the trend and level of the stock market? Chapter 14 of The Wave Principle of Human Social Behavior characterizes a rising social mood trend as correlating, among other things, with “friskiness, daring and confidence,” a falling trend with “somberness, defensiveness and fear.” We now have a tenuous basis for a socionomic hypothesis regarding demographic trends. When aggregate feelings of friskiness, daring and confidence wax, people engage in more sexual activity with the aim of having children. When these feelings wane, so does the desire for generating offspring. It takes about nine months between the procreative impulse and a child’s birth, which is why, at least at market bottoms, annual data on births lag annual data on the stock market by one year. Figure 2 shows the same data, lagged by one year to reflect conceptions. The result is not an extrapolation or theory, nor is it the result of elaborate exercises in data fitting, as we find so often with hypotheses that demographics drive the economy. We know that a procreative decision or impulse is required nine months prior to a birth, so there is no theoretical presumption in repositioning and renaming this data.10 Now the two major lows line up exactly.

Let’s investigate the relationship at market tops. As you can see from the slash marks imposed upon Figure 2, the rate of procreation has declined prior to major tops in the Dow Jones Industrial Average. This is precisely the same behavior exhibited by indicators of market breath and rates of change for stock averages, which always peak and begin declining before the major blue-chip averages top out. To visualize the similarity, let’s graph the relationship between procreative activity and the success of the broad stock market, not just the blue chips....MORE
From Calculated Risk (April, 2010):

...That calls for a graph...