Curious Capitalist

Jobs Numbers and the Economics of Emotion

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Consumer confidence is up, and the new jobs numbers – the U.S. added 227,000 jobs in February, the third straight month of 200,000-plus gains — show that the U.S. economy continues to improve. Does that mean we are going to finally start seeing a shift out of the era of fearful, volatile markets that we’ve been in for over three years now? I’ve been thinking a lot about this question since listening to a presentation by investment expert Peter Atwater at the New America Foundation a few days ago.

Atwater, who is the head of Financial Insyghts, a firm that studies the effects of consumer mood on the markets, has fascinating theories about how our own emotional states effect everything from stocks to presidential elections to the kind of art that’s popular. Since the financial crisis in 2008, our mood has been closed in, negative, and isolationist. He calls it the “me, here, now” era.

(MORE: 227,000 New Jobs Is Good. But Has the Economy Reached Escape Velocity?)

A little over a decade ago, by contrast, we were having an “us, everywhere, forever” kind of moment.  Back before the dot-com bubble burst in 2000, everyone was getting rich (or seemed to be), and consumer confidence was at record highs. No wonder the S&P500 was soaring, and concept stock picking (dot-coms can only go up, right?) seemed logical. When confidence is high, anything is possible – remember that the euro came into being during this era of optimism.

But according to Atwater, our mood actually dictates the market — not the other way around. You can layer the S&P500 Index on top of the Bloomberg Consumer Comfort index since 1993 and see a nearly perfect reflection. That said, the dips and the heights don’t actually reflect fundamental stock valuations. The markets respond to our moods, but neither is necessarily logical.

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So what does all this mean for where the markets are headed today? Fearful times lead to fearful stocks – dividend picks, companies that allow us to rent rather than own, ideas that play to risk prevention (like just-in-time inventory), and an orientation towards ourselves, rather than others (Facebook, anyone?). More confident times might favor an entirely different group of companies. For more on what our moods are telling us about the markets, subscribers can check out my Curious Capitalist column on the topic in next week’s Time Magazine.

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