Odd Lots - How to Use Pop Music to Forecast the Stock Market

Episode Date: April 21, 2017

When most people analyze the stock market, they look at stuff like revenues, earnings, valuations, and economic conditions. But some people like to look at the Billboard music charts or what kinds of films are popular at any given moment. On this week's Odd Lots, we talk to Matt Lampert, the director of research at the Socionomics Institute, which attempts to analyze the market by looking at the nation's social mood. And there's no better way to examine society's mood than by looking at pop culture. Are horror movies in vogue? Are people listening to upbeat pop songs? Each of these things, according to Lampert, can offer a clue about the state of the nation and therefore which way the market will go next.See omnystudio.com/listener for privacy information.

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market businesses. Learn more at cIT.com. Put knowledge to work. Hello and welcome to another episode of the Odd Lots podcast. I'm Joe Wisenthal. And I'm Tracy Allaway. So, Tracy, I don't think I've ever asked you this, but do you like the Beatles? I feel like there's only one way to answer that question, right?

Like, you would be worried if someone said that they didn't like the Beatles. I have met people who say they think the Beatles are bad, but every single one of them is either a troll or a mindless contrarian, and I don't like those kind of people. What do you think about the Beatles? I actually think the Beatles are underrated, and it sort of fit. I have this belief that the best things in life,

like in any category are always underrated. Like I think Michael Jordan and Muhammad Ali are underrated, for example. Okay. But that's a, we could, that's a topic for probably another episode. But the topic for this episode is the Beatles or music in general or what are we going to be discussing? It kind of is the Beatles. Did you know that, you know, if you look at the history of the stock market that certain peaks and troughs in the market actually line up with Beatles songs?

You know, I have at one time or another seen that chart, and I've always been very intrigued by it. But of course, I guess when you see a chart like that, the thing that springs to mind is correlation versus causation, right? Right. Yes, exactly. But, you know, there are people who think that we can look at things like what kind of songs are popular at any given time or what kind of fashions or what kind of other cultural

things are going on and then use that to tell us something about societal mood and then use that information to make calls on the market. I mean, that sounds really fascinating to me. And I can see how you could use pop culture to gauge maybe optimism and the strength of the economy. But again, like, I suppose the big issue is whether or not you get into a chicken and egg situation, right? Like, is the mood following on from the economy or is the economy driving the moon? Right. It's fascinating. Or is it all, I mean, the third possibility is that there's no connection at all if people are just drawing random lines on charts.

But anyway, I'm still intrigued. And there's this guy, Robert Prector, who founded something called the Socionomics Institute that examines this in-depth, this connection between cultural mood and the market. And we are going to be talking to. to someone who works at the Socionomics Institute to really dive into these connections. And we're going to listen to some Beatles songs, right? And that's really what we're doing here. We're going to listen to some Beatles songs and talk about some charts.

So it should be sort of a dream episode. I'm excited. Matt Lampert, thank you very much for joining us today. It's a pleasure to be here. So, Matt, first of all, just tell us what is the Socionomics Institute? What do you do, who founded it, and what do you study? At the Institute, we study the relationship between social mood and social events. When we tend to think about mood and events, the common perception out there is that events shape our mood.

So we'll read things in the newspaper like a new jobs report came out and that made consumers more optimistic or a politician gives a rousing, encouraging address and perhaps that will lift investor conference. What we do in Socionomics is we look at that relationship the other way around. So instead of starting with the events, we start with the mood. And we look at how social mood shapes the tenor and character of social events, because those events have to come from somewhere, and they come from people, people who have feelings. So we find that if you look at how people are feeling, then you've got a leg up on anticipating their actions. And this whole perspective came about through a marketing. named Robert Prector. He was a Wall Street guy. He worked at Merrill Lynch for many years as a

technical market analyst, and he was successful, and he decided he would start his own firm. And the emphasis of the firm started being fairly market-focused, but as he went on in his career, he realized there were all these interesting connections between what was going on in the stock market and what was going on in popular culture with music, movies, movies, politics, all sorts of stuff. And he started to cultivate a theory that linked those two things together. And his proposal was that it was a common social psychology, a common social mood that was driving activity in all of these different domains. So when investors were feeling more optimistic, they were inclined to bid up stock prices. But when voters were inclined to feel optimistic,

they were inclined to reelect incumbents. And when teenagers were feeling optimistic, they listened to happy, upbeat pop music, and then the opposite when that mood turned negative. So, Matt, tell us how do you actually go about gauging the public mood? You mentioned pop culture there, but I imagine there's some wiggle room for interpretation, right? We look at all sorts of indicators. Prector argues that the stock market is really the best indicator of social mood, because not only is an area where people can express their levels of optimism and pessimism, but they can do it quite quickly.

It just takes a few moments to trade a stock, a few clicks of a mouse or a cult, to a broker. And we've got stock data going back hundreds of years so we can back test the theory and we can also track mood in real time. But we definitely look at a number of other indicators as well. There's survey data out there on consumer confidence, economic confidence. We look at, as you mentioned, pop culture indicators, what music's popular, what movies are popular. But we really find that the stock market is the best indicator of mood. And we use some of these other indicators to confirm or deny the message that the stock market seems to be giving us. Now, in the intro, we mentioned the Beatles. And there's this chart that I've

seen floating around the internet for a long time titled, Major Events in the Beatles' Career tracks social mood. And it's a chart from, of the Dow Jones from 1956 to 1970. And at various times in these 14 years, it's annotated with key events. in the history of the Beatles. So, for example, there's a market peak right around when rubber sole came out. It spent six weeks at number one. What's the connection there? So then the market immediately dropped. So let's put this social mood theory into practice. Tell us something about what was on rubber sole and then tell us how it might have indicated at top of the market. The study that you're talking about is one that Robert Prector did. It was a, a,

a case study of the Beatles where he tracked their career and found that they were a group that aligned quite well with the trends in the market. And if you look at their history, look at the Beatlemania period, basically goes from 1962 to 1966. This is when they were performing in front of stadiums with screaming fans. The whole Beatlemania phenomenon was going on. And what happened, like you said, in 1966, this phenomenon tops out. It's the top of the market.

right around the same time. And Precter's argument is that what's happening here is that social mood is becoming incredibly optimistic here in the mid-60s. And investors are expressing that optimism by bidding stock market prices, stock prices higher and higher, and teenagers are expressing it by going out and screaming and buying Beatles records and singing along and this sort of thing. And after that top in the market in 1966, what we see is a change in social mood, a change, in the psychology. And with that change in psychology came a change in behavior. So the Beatles decide that they're going to stop live touring. They're going to stay active in the studio, but they retire from doing the live shows. There's internal tumult within the group. They're

receiving death threats, this sort of thing. The market eventually rallies. They get more active in the studio. They decide that they're going to record and put out another album. But the bear market was already in play here. And in April of 1970, is that bear market really started to unfold. Paul announced that he was leaving the group, and then the band released their last studio album early the following month within days of the Kent State shooting. It's also the month of a low in the market.

So we see this change in psychology showing up throughout the social experience. It's showing up in the market. It's showing up in the music, and it's showing up in the character of political and social events as well. But here's what I don't get about the specific example. So if you say that the peak of Beatlemania, coincided with the top of the stock market. And a lot of teenagers were really excited about this new rock group and they were singing along.

I mean, there were a lot of people around who didn't like the Beatles and who saw it as like a sign of the deterioration of the old world order that they were familiar with. So how do you kind of, I mean, how do you gauge like who likes what and which is more important for overall mood? We really look at what's popular. The Beatles are one of the most popular music acts in the history of the planet. And sure, of course, there's always a mix, right? There are people who like certain things and people who don't like other things, but they're definitely a very, very popular group. But it's important to keep in mind, too, that, of course,

there's a mix of opinions, beliefs, actions, feelings in society at all times. Social mood's always in flux, and within that flux, there's always a mix going on. But the question we look at, or what we look at is what's the quantity and intensity of positive expressions relative to negative expressions. So things are never uniformly positive. They're never uniformly negative. There's always a mix. But sometimes the balance is shifted far more toward the positive side or far more toward the negative side. And that's really where you can get a better idea of what's going on in the mood trend.

Continuing on the Beatles, and then we could sort of move off it, I noticed in the late 60s the white album was released. That's one of my favorite albums, and that was a key peak in the market. Well, there was also a change in the tone of the music around this time as well. They started becoming more introspective. The songwriting became more complex. And one of Precter's observations is that in negative mood periods, one of the main. manifestations that we see, at least in the music world, is not only a harder-edged sound to it, but also more sophisticated lyrics, more sophisticated songwriting as the Beatles grew

wore on. Is there a song that you think from that period that really sort of captures this new style of introspective, slightly darker songwriting of the Beatles that one could listen to that would have foreshadowed the coming sell-off in the market? It appears right after that, the Dow was at around 1,000, fell as got around 600. So a fairly significant sell-off in the Dow over the next couple of years. Is there a song or something that sort of, you think, really encapsulates this mood change? Well, there's definitely a change in the tone of the music.

For example, if you look at the Beatles' early stuff, it's energetic. They're singing, you know, she loves you. Yeah, yeah, yeah. And then by the end, they're singing, hey, Jude, and it's, you know, it's slower, it's dorker. but really what we're doing here is what we're trying to look at is this change in psychology that's going on and we're not necessarily using the Beatles as a cell signal or a by signal or something like that we're really just trying to say this psychology is showing up in a lot of different areas of social expression and music music is one of those and now let's take a break for a word from our sponsor but first we want to take a moment to let you know about something new from

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Put knowledge to work. We're back. We were just talking about the Beatles and whether or not you can sort of trace social mood through the ups and downs of the Beatles' career and whether that has an impact on wider markets. So, Matt, I wanted to fast forward about 40 years. Let's go straight to now.

When you look at the social mood at the moment, what do you see and what particular things are you looking at to gauge it? Right. So mood right now is at a really interesting juncture. So we've got in the U.S., you've got the markets near all-time highs. There's been all sorts of things written about how. how calm the markets are and how volatile. I mean, we've heard this, what, a million times over the past month or so.

So you've got this complacency that's going on, at least in the U.S. But if you turn around and you look elsewhere in the globe, let's say you go over to Europe, what you see is a pretty different picture. The Eurostocks 50 index topped in 2000, and on that basis, the Eurostock has been in a bare market ever since. Now, some national indexes have rallied to new all-time highs or, if not have rallied strongly within that trend. of late. But you look at the tenor of character and actions in Europe, and they're so different.

You've got all kinds of political fracturing going on within the EU. You've got breakdowns and tension. I mean, this was supposed to be a glorious alliance of all these countries that have fought for thousands of years with each other, and now they tried to get together and form a union. Well, that's a manifestation in itself of a large-degree positive mood trend. And as that moods turn negative, we've seen the social manifestations of that turn negative as well. And we've gotten a flavor of that in the U.S. certainly there's all kinds of polarization too, but certainly not quite at the level of Europe just yet. When you look at cultural things in the U.S., is there anything equivalent that you're tracking sort of musically,

film stuff, artistically that sort of might give you a sense of where the mood is in the U.S. or signs that it may be turning in one direction or another? One of the things that Prectors looked at in the movie space in particular is trends in Disney movies versus trends in horror movies. So the heyday of Disney in the mid-1960s where they released some of their classic films, and of course it started with Snow White well before then. You know, this is great positive mood stuff, upbeat Family Fair. There was a Disney Renaissance in the late 80s and the 90s where again they just had hit after hit after hit. hit. And then that got interrupted. In the early 2000s, horror movies came back in vogue. You had the saw films, the torture movies. And these films were a callback to films that were popular

in the bear market of the 60s and 70s, the Texas Chainsaw Massacre, and then just genuinely scary films like The Exorcist, which themselves were callbacks to films that were popular in the early 1930s during the Depression, Dracula, Frankenstein, this sort of thing. So, Right now, we've seen another hit from Disney. They had Frozen fairly recently within the past few years, but then, of course, the Beauty and the Beast remake was a huge hit. They had a Cinderella remake that was a huge hit. The Jungle Book remake was a huge hit.

So those movies are still popular, and we think that the social mood has a lot to do with that, but if you're a horror movie fan, just hold your breath. It's okay. When mood turns negative, there should be some more groundbreaking horror stuff on the way for you. I mean, you're mentioning Disney movies, the comeback of Disney right now. You mentioned earlier that the stock market was probably the best expression of current mood. So if you look at the U.S. market, which seems to be reaching new highs every week now,

how do you square that with what's been going on in politics? Because when we look at the U.S. elections and a lot of the sort of populist political issues happening right now, it seems like there is a lot of anger out there and there is a lot of uncertainty. There's definitely a lot of political polarization going on in the U.S. And in fact, my colleague here at the Institute, Robert Folsom, did a study called Why Trump, Why Now. It came out in March of 2016 during the primaries. And one of the interesting things about the primaries is that the candidates on the Republican side, at least initially didn't take Trump very seriously.

Jeb Bush spent all kinds of money attacking the other chance. challengers and basically figured, hey, this Trump guy will peter out on his own. But Robert looked at the market and reached a different conclusion. Now, what we like to do with the market is we like to look at it in nominal terms. We also like to look at it in real money terms. And if you look at the market in real terms, what you find is that the all-time high in the U.S. was in 1999, and we've been in a large-degree bear market ever since. Now, since 2011, that index has been rallying. We think it's a bear market rally. But once you start to see, okay, well, we've got nominal markets at all-time highs. You've got the market in real terms in this bear market rally. It makes sense that you'd still see a little bit more of a mix. And the polarization that we saw in the election certainly makes sense in that context. And we think that if we see the nominal indexes joining the real money indexes on the downside, that's when what seems like intense polarization now will get even more so.

Yeah, it sort of reminds me of one of my favorite charts, which is just the Dow Jones divided by the price of gold. Because it's sort of, to me, is like a measure of like, you know, stocks are the sort of investment in human capital cooperation, society progressing. And gold is a rock or a metal or something that has no real productive value. And what you see is sort of, as you say, in 1999, 2000, that ratio hit incredible. all heights and we're still not anywhere. And that declined, as you said, through 2011 is when that ratio hit its low. And we're still not anywhere near the old highs in terms of, you know, that ratio signaling at least, you know, relative to about, you know, 15 or 20 years ago, people are still really into rocks relative to humans. That's right. It's interesting to look at

markets priced in gold. We like to look at Dow Gold for sure. And my colleague Alan Hall has just been doing some work recently where he's looking at lots of other national stock indexes priced in gold. And what you find when you do that is that the rally in the U.S. since 2011 is one of the longer rallies when you look at these gold-denominated indexes globally. A market like Russia has seen its nominal and real money indexes falling in tandem since about 2008. And when you look at the social manifestations that are going on in Russia, suddenly it starts to make a little bit more since. I mean, back in 2007, Russia was the darling of investors. Vladimir Putin was Times Man of the Year. They were part of this assortment of brick countries along with

Brazil, India, and China, where there was allegedly huge investment opportunities out there. And in that environment, Alan said, look, there's so much optimism surrounding Russia right now. This is very likely going to be a peak in the Russian markets and use the Elliott Wave model to verify that analysis and said, folks, we've got a major bear market coming in Russia. And when we see that, that change in psychology manifests in the market, that's when it's definitely time to be on the lookout for a military resurgence from that country. And after the market declined, there was the invasion of Ukraine. And we've seen just this resurgence in militarism coming from Russia.

And once you understand the psychology over there in the context of this long-term negative mood trend, it starts to make a lot more sense. Matt, that kind of reminds me. I wanted to ask how much analysis you do on non-U.S., non-European countries and how you actually do that analysis. Like, would you gauge social mood in an emerging market like India or Vietnam, and how does gathering that information differ from doing it in a developed market? Sure. Well, with the wave of globalization that took hold from the 80s, and into the early 2000, we've got market indexes just about all over the world. And we have analysts who cover those markets and also look at them through a socionomic

lens to look at the cultural manifestations in those countries. My colleague Mark Galeshevsky does a lot of work in Asia and the Middle East, looking at India, Pakistan, and then China, Japan, this sort of thing. And the method is similar to what we do in the U.S., where you take the stock index in the local country, use that as an indicator of mood, and then you use it as a benchmark to forecast and contextualize social events that are going on over there. Matt, we have to wrap up soon. But I think, you know, the part that sort of I'm still struggling with is, you know, and I'm sure you've heard this people question this before, which is that, you know, you can see a

move, you can see a move in the stock market and then go back and construct. an argument for why the mood was good. So we say, okay, the stock market's been doing really well for the last several years. And look, Disney movies, there are a lot more Disney movies than there were horror movies. And so this is a sign that people are optimistic. Or you're saying, the U.S. elected Trump and you're like, but we're still kind of in a long-term bear market in real terms. What do you say to people who say that this kind of analysis is essentially retrospective fitting of events to markets and that you can sort of ex post facto come up with any mood characterization that you'd like to get it to work.

Well, I think having some objective criteria for your analysis goes a long way in doing that. But the other thing that we do is we issue real-time forecasts all the time. We've got a monthly publication called The Socionomist where every month we're issuing real-time forecast and analysis of what's happening right now. and looking ahead into the future. So I think you just do your best to forecast in real time. And then when you look at the past, you just try to be as objective as you can, lay down some parameters and see where the data take you.

Matt Lampert of the Socionomics Institute really appreciate you coming on, fascinating work that you do. Thank you so much. So, Tracy, are you going to start scanning the weekly billboard charts and box office receipts to gain some insight? done where the market's going? I was kind of thinking, like, if you think that the Beatles were a good way of gauging social mood because they were something around which a large proportion of people coalesced, what would be the equivalent today? And the only thing I could think of was either

Taylor Swift or maybe One Direction or Beyonce? I don't know. Well, I would say, yeah, I was going to say Taylor Swift and Beyonce are probably the only two musicians today that have the sort of like mega power, mega influence, mega fan base that might be able to tell you anything about where the market's going. So maybe that's a good, a good reason to listen to both of them more closely and see how their songwriting styles evolve. Right. It is interesting. I think Taylor Swift like sort of switched from country to pop fairly around the time the market rebounded. So maybe there is something there. Yeah, but here's the thing.

I mean, I was kind of talking about it with the Beatles. But like, does everyone love Taylor Swift? No. Like, is it a pretty big movement? I just don't know how much signal you can actually get from Taylor Swift. No, and I thought that was a really good question in general that, yeah, sure, the Beatles. are popular, but other people probably at the time saw it is the collapse of Western civilization that the kids were listening to rock and roll. So I think it's intriguing stuff. I love looking at

their charts. They fascinate me. I'm not sure I would necessarily commit my life savings to strategies based on it. But look, I consider myself an open-minded person, so I won't dismiss it entirely. Look, I think most people would say the more data that you can get, the more informed you are as an investor. So I feel like there is something there with social mood. Absolutely. And, you know, one of our previous guests on the show, Peter Atwater from Financial Insights, is also very into it and he does it very well. And if you think about the economy and the fact that a large portion of the economy is driven by people's confidence and their belief in their ability to invest, then there is an obvious link. I just find it difficult to kind of tease it out

because ultimately you're dealing with human behavior and emotions and it can be tricky. Still, it's a good excuse to listen to more music. Yeah, okay, let's go do that. All right, sounds good. This has been another episode of the Odd Lots podcast. I'm Joseph Wisenthal. You can follow me on Twitter at The Stalwart. And I'm Tracy Allaway. I'm on Twitter at Tracy Allaway. Thanks for listening. Put knowledge to work and grow your business with CIT. From transportation to health care to manufacturing, CIT offers commercial lending, leasing, and treasury management services for small and middle market businesses. Learn more at CIT.com. Put knowledge to work. The news doesn't stop on the weekends. Context changes constantly. And now Bloomberg is the place

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