By Robert Folsom | February 1, 2013
Stock averages allow the crowd to monitor itself, like fashion-conscious people watching each other at a shopping mall.
—Robert Prechter, The Wave Principle of Human Social Behavior
That one-sentence analogy covers a lot of ground to explain the psychology of the stock market. Lots of folks never have/never will own stocks, whereas all of us engage in people-watching — literally from that moment in infancy when our vision comes into focus.
And in truth, the link between stocks and fashion goes much deeper than a mere analogy.
Like, for example, the way today’s stock market helps explain today’s trend toward sheer styles in women’s fashion.
I’ll return to “sheer” in a moment, but not before I mention the famous hemline indicator. It dates from the 1920s and was considered Wall Street lore for decades; yet it correctly observes that skirts tend to move up the leg in bull markets, and back down in bear markets.
Which is to say: Hemlines reflect the same positive/negative collective mood that drives the stock market.
But it wasn’t until September 1985 that a national audience finally read a full account of social mood as the engine of behavior. A cover article in Barron’s magazine, titled “Elvis, Frankenstein and Andy Warhol,” said this:
The trend in stock prices is a reflection of popular moods within the investment community, and by extension, within society at large….Trends in music, movies, fashion, literature, television, popular philosophy, sports, dance, automobile style, mores, sexual identity, family life, campus activities, politics and poetry, all reflect the prevailing mood of society.
Bob Prechter was the author, and his analysis generated a lot of “buzz.” A handful of academics were also studying investor psychology in the branch of economics eventually known as behavioral finance. Here’s Yale economist Robert Shiller in 1990:
Investing in speculative assets is a social activity…. It is thus plausible that investors’ behavior (and hence prices of speculative assets) would be influenced by social mood. Attitudes or fashions seem to fluctuate in many other popular topics of conversation, such as food, clothing, health, or politics.
Now back to sheer — specifically the Jan. 16 “On Style” column in the Wall Street Journal: “The trend is clear: Spring fashions will soon fill stores with the sheerest of clothing.”
Mind you, sheer does not mean completely bare, because “even the most avant-garde offices are unlikely to welcome too much visibility.” The stock market has seen a strong bull run, yet within a larger long-term negative mood trend.
Mixed mood includes the opaque — yet even that will show you something.
The latest issue of The Socionomist answers the question, “Is Herding Built Into Our Brains?” Follow this link to learn more.
Speak up in the comment section, or join the conversation in our Twitter community.