Market Narratives Have Pushed Aside Fundamentals
Logic and mathematics once made up the basic laws of investing. No more.
Bloomberg, June 17, 2021
I want to share some background about today’s column, with some thoughts that (for reasons of length) I did not include in the piece:
Narratives have been a powerful force in markets ever since speculators gathered in the late 1700s under a buttonwood tree at the foot of Wall Street to buy and sell securities. I have been thinking about this as it relates to the current era of debate on everything from crypto to inflation to meme stocks. I kept coming back to the question “What if Narrative was EVERYTHING?”
Yale professor Robert Shiller is the expert here, and in an email exchange, he suggested that narrative is only part of the story-telling equation — how story contagiousness is just as important:
“It isn’t that everything comes down to narratives. I have been saying that the efficient markets theory is half true. But movements in stock prices are quite substantially driven by narratives, and especially so at the aggregate or sector level. Most of stock market aggregates’ movements are narrative-driven. I wonder if the pandemic makes this point by analogy. The first, second, and third waves of coronavirus contagion, differing across countries and cultures, are the product of differing contagion or recovery rates. The same is true with perennial narratives.
A story becomes newly on everyone’s lips not because it is true but because its contagion rate has gone up or recovery rate has gone down, just as viruses can see surprising new spread because of a subtle mutation. Contagion rates of stories are affected by such things as superficial resemblance to recent events, celebrity connections, and even sometimes by their outrageous daring falsehoods.”
This is parallel to the technology debates of the late 1990s: What mattered more, Content, or the Pipes to deliver that content? Which is more important, HBO, or Time-Warner Cable?
The answer, as evidenced by a variety of mergers, was both. And so it is with markets: Narratives and their virality, storyline and infectiousness.
If these topics are of interest, two books delve deep into them and are well worth your time: Shiller’s “Narrative Economics: How Stories Go Viral and Drive Major Economic Events;” and Derek Thompson’s Hit Makers: How to Succeed in an Age of Distraction.
If you don’t want to read two books on the subject, perhaps I can interest you in 800 words on the matter: