Humans love a good story. We need a narrative to put things in place…whether they actually belong there or not. These narratives can play out on a very large scale, which I’ll get to in a moment, or on a much smaller, day-to-day scale.
The stuff that’s written about why the market did this or that on a daily basis is a good example of short term narrative. Sometimes it makes sense, sometimes it doesn’t.
Over the last week or so, stock markets have been under the pump on concerns about rising trade frictions with China. With the S&P 500 trading on a price-to-earnings multiple of around 25-times trailing earnings (which means the market is expensive and highly sensitive to bad news) the negative reaction makes sense.
Because the new narrative in the market is that stocks are falling due to ‘trade fears’, any rise must mean that ‘trade fears’ aren’t as bad as first thought. You saw that yesterday with Wall Street’s strong recovery.
Apparently (we were told) China and the US were taking a more conciliatory tone with their trade discussions. That narrative flowed through into early overnight trade in the US, as reported in an AFP article:
‘Stock markets rose as fading fears of a US-China trade war prompted fresh buying in Europe and pushed Wall Street higher in early trade.
‘“US stocks are adding to yesterday’s sharp recovery in early action, with trade war concerns between China and the US appearing to continue to cool,” Charles Schwab consultants said.
‘Investors were “buoyed” by a “softening trade stance”, senior market analyst, Craig Erlam of OANDA, said.’
Here’s how it works. An AFP journo does the ring around getting comments for a quick market update article. They get someone on the phone who doesn’t realise they can say, ‘I don’t know’, and so they repeat the story they’ve been hearing. And the story then becomes ‘fact’, or the new narrative.
The problem though is that the market is not agreeing with the fabricated narrative. In the last hour and 20 mins of trade in the US overnight, the Dow Jones plunged nearly 350 points. After starting strongly, it finished down 1.4%.
When narratives don’t ‘stick’, the market becomes increasingly jittery. If the agreed upon reasoning isn’t working out, then what the heck is going on! This is where ‘uncertainty’ comes into play.
You know that well-worn phrase, ‘market’s hate uncertainty’? What it really means is that investors don’t like it when there is no discernible narrative to cling onto.
When the journos ask the strategists for comment, they’re not sure what to say. So they say, ‘there’s a lot of uncertainty around right now’. Meaning, ‘I have no idea what’s going on and don’t know what to tell you’.
The easiest way to think about things right now is that US markets are expensive. The high level of confidence that produces expensive stocks (think back to January) is starting to wane. The future, all of a sudden, is no longer as clear as it appeared to be just a few months ago.
This chips away at confidence and results in investors taking money off the table. You can see this in the chart of the S&P 500, below. Overnight, the index fell 1.73%. It closed below its 200-day moving average for the fourth day in a row. That’s the longest streak since November 2016 when the market got the pre-US election jitters.
[Click to enlarge]
This chart tells you that the mood of the market is changing. In the weeks ahead, I wouldn’t be surprised to see a decline to 2,500 points. That’s only a 4% fall from current levels. But it would represent a new low and raise the question of whether US stocks are moving into a bear market. That wouldn’t be good for confidence, would it?
Taking advantage of power
Since we’re talking about the power of narrative, and it’s the week leading up to Easter, let’s finish with a question. What’s the most important military battle in history?
In my uneducated, ill-informed opinion, that honour goes to the Battle of Milvian Bridge, in October 312. This is where Roman Caesar (a bit like a junior Emperor) Constantine fought another Caesar Maxentius just across the River Tiber in Rome.
Constantine won in a rout. And in a now time honoured tradition, he put the victory down to ‘God’, or more particularly, Jesus Christ, who apparently came to him in a dream the night before battle, holding an emblem of the cross.
At the time, Christianity didn’t was a small sect. And a much disliked one by the Roman elite around that time.
But following the Battle of Milvian Bridge, Constantine halted the persecution of Christians and ordered that any property that had been taken from them be returned. He soon exempted the churches from paying any tax (which continues to this day) and opened his imperial coffers to the new religion. Christianity became the new state religion.
This new found wealth and acceptance saw the power of the Christian narrative steadily grow. Churches were slowly built on the sites of the old pagan temples. Still, Paganism and Christianity coexisted for hundreds of years after Constantine converted on his deathbed in 337.
But as the power of the Church grew, so did their contempt for other modes of belief. As the saying goes, absolute power corrupts absolutely. A forged document (supposedly ‘found’ from the time of Constantine) from the ninth century, known as the ‘Donation of Constantine’, attempted to shore up the power of the church. It declared Papal authority over the state and granted the Church considerable land assets, among other things.
The Christian narrative was then reinforced through art and imagery (not to mention inquisitions and the complete wiping out of those who didn’t share the Christian beliefs). To this day, we marvel at the work of the renaissance artists, who were all largely commissioned by the Vatican. The sublime art helped the masses believe, while the elites took advantage of this belief.
The sale of indulgences (selling salvation, basically) was the last straw for the monopoly on power that Catholicism had become. It led to Protestantism and ushered in hundreds of years of bloodshed as two great narratives struggled for dominance.
As I said at the start, humans love a good story…even one that threatens to kill them.
So, this Easter, let’s remember the founding message of Christianity, while also acknowledging the power of narrative and the willingness of humans to take advantage of that power at all costs.
Editor, Crisis & Opportunity