Watching the markets tank yesterday, supposedly because of a pessimistic World Bank (!) report, got me to thinking about Elliott Wave analyst Robert Prechter’s belief that news doesn’t move markets. Instead, he says, our reaction to events is what matters, and that depends on how we’re feeling -- i.e. the social mood. Prechter’s take (I’m extrapolating here) is that if investors were feeling good on Monday morning, news of the World Bank cutting its growth forecast might have led to visions of lower interest rates and more stimulus money, possibly igniting a rally. Or investors might have ignored the report and bought because that’s just what they wanted to do. But these days we’re nervous, and therefore prone to see the dark side of the day’s headlines.

Prechter actually goes farther, stating that the news itself is driven by social mood. Here’s how he put it in a recent interview:

“People . . . think news should move the market around, but it doesn’t. News is a report of the social actions taken in response to waves of social mood. So people who dig through the news for causes are actually studying results.”

Obviously, most traders still behave as if headlines move markets, reacting to the news -- and to expectations of others’ reactions, and so on. But the mainstream press may be catching on to the concept of social mood. Consider this, from a June 17 Wall Street Journal column by E. Kinney Zalesne. Note how he trashes gloom-and-doomers while seeming to accept their analysis:  

Doom and gloom are in, optimism is out. The fact that the stock market appears to have righted itself after the steep declines late last year seems out of step with the daily water-cooler talk about what is going to happen next. Fear about the future abounds, along with theories of how things could get worse. Behind these theories is the persistent (and perhaps correct) belief that there is another shoe to drop. Just as people start to get more comfortable, it is all going to come tumbling down again. While a few "doomsayers" were once the outliers among a widely optimistic populace, today there are millions of new pessimists talking up calamity and catastrophe as never before. In just a few short years, we have gone from President Clinton's oft-repeated "the best is yet to come" to fears that the "the worst is yet to come." Hope reigned through most of 2008, but fear does in 2009. A recently completed ABC News poll shows that most people see their opportunities as permanently diminished, with job security and retirement impaired and unlikely to return to pre-recession levels. The result is that two-thirds report they are less likely to take out a credit card, and most say they are less likely to take out a mortgage or ever invest in the stock market. ABC News pegged the assessment of current economic conditions as at the lowest levels in 23 years of polling. Not only has the economy been reset, but the American psyche has been reset as well, and this could have enormous impact on our future. Hardest hit are the 45- to 54-year-olds, according to the poll. They have taken many of the sharpest blows and have the fewest options to recover, since they have made their basic family, work and economic choices years ago and are now feeling the pressure of middle-aged responsibilities of kids and parents. In addition to the current economic conditions, we do have some other underlying drivers of doom theories. Iran and North Korea are on the verge of becoming nuclear powers, the commercial real estate market is rumored to be on the edge of collapse, the swine flu is a pandemic, the deficit is rising by trillions of dollars, and we have just been through the worst stock and liquidity crash in recent history. We're not talking about the extreme end, the "preppers" who are New Mattress Stuffers gone wild. They believe you have to be ready for a return to an almost primitive state of existence and survival. This is something quieter -- a deep sense of doom we haven't experienced perhaps since the nuclear fears of the 1950s after Russia got the bomb and launched Sputnik. We are experiencing record suicide rates among our military and teenagers. Twenty-four U.S. soldiers appear to have committed suicide last January -- four times the rate in 2008, when they faced more dangerous conditions. While optimism drives individual creativity and entrepreneurship, unchecked doomsaying can do the opposite -- foster greater reliance on government, promote short-term decision-making, drive up crime and social problems and encourage undue caution. The American Dream is being downsized instead of supersized. Nassim Nicholas Taleb's "The Black Swan" is flying off bookshelves with its theory that throughout history we have always underestimated the odds of impending calamity. And a new novel by Matthew Glass, "Ultimatum," is a collection of modern-day fears of coastal flooding and Chinese stock market crashes bundled together in what the Economist calls "a thriller for our age." And billionaires like Pete Peterson and T. Boone Pickens are out there with their doom theories based on the deficit and running out of energy. The thing about doom theorists is that historically they have almost always been eventually right. It's like those stock analysts who perennially predict a crash and are mocked until the one year in 10 when they are right, and suddenly they "knew all along" what was going to happen and become overnight sensations. The commercial opportunists of doom are out in force -- dominating growing numbers of magazine covers, helping brokers sell new investment products to those with money and helping companies sell credit rescue services to those without resources. This is on top of the gold, safes and guns that were big sellers when the financial crisis started. Mr. Obama is on the right track as an ever-present leader who people have confidence in to fix things. But the numbers show that despite some improvements in the financial picture since George Bush left, it's been a long time since the public has been so ill at ease about its finances, or gloomy about the future. Wall Street Journal, June 17, 2009