War and the Financial Markets

by Susan C. Walker

Hezbollah in Lebanon vs. Israel; Shiite vs. Sunni in Iraq; Al Qaeda proclaiming jihad on Israel; Iran and North Korea pursuing nuclear weapons…Roiled by bloody conflicts, terrorism and acts of violence, the world is increasingly at war today, harking back to Bob Marley’s 1976 lyric, “War, war and rumors of war.”

Generally, people think that war and violence make the public feel worried, depressed, and angry. First comes war, then comes the negative reaction in social mood. But the opposite point of view makes even more sense. That is, first people feel angry, and then they make war. The corollary is that when people feel happy, they make peace.

This formula is a 180-degree turn from the normal idea about which came first. But if this different perspective sounds right to you, then you might also like to know that a good way to take the measure of a nation’s social mood is to look at its financial markets. Bull markets signify a positive social mood, while bear markets signify a negative social mood.

The longer a bull market goes on, the more positive and happy the populace feels and the more it works together on social goals. The longer a bear market goes on, the more negative and unhappy people feel and the more they become polarized from one another and want to fight over issues. Bob Prechter of Elliott Wave International has developed this theory, which he calls “socionomics,” based on patterns of the human herding instinct.

Since financial markets record the bullish (positive) and bearish (negative) moods of millions of people, they turn out to be a useful measure of social mood. That’s why back in 1982, Prechter was able to predict that with a bull market in full swing – and here to stay for a while, according to his technical analysis – there would be “no major international war for at least 10 years.” And there wasn’t. In fact, the euphoria of the bull market lasted until 2000.

As Prechter tells it, a bull market brings with it a sense of community, good will and feeling of inclusion, while a bear market brings the rise of factions, intolerance and a feeling of wanting to exclude others. “At a peak in the markets, it’s all ‘we.’ Everyone is a potential friend,” he says. “At a bottom, it’s all ‘they.’ Everyone is a potential enemy. When times are bad, intolerance for differences grows, and people build walls and fences to shut out those perceived to be different. When times are good, tolerance is greater and boundaries weaker.”

But, you might say, the bull market during the 1950s and ’60s wasn’t exactly a total love-in. There was something called the Cold War. What do you say about that? Prechter says that was a perfect example of the kind of conflicts that take place during bull markets: “Bull-market hostilities mean you don’t fight,” he says. “The Cold War was a phenomenon of a bull market. Hot wars happen in bear-market trends.”

Which leads us to the state of martial affairs in the world today. Although the world’s financial markets are not out-and-out bear markets now, the trend lately has been more sideways and down than up. Many hit multi-year highs two months ago. Social mood could be turning from the powerful pull of positivity to one of negativity. From the looks of the warlike world around us, it seems that people have become less likely to want to work out solutions to conflicts together and more likely to start shooting and ask questions later.

It looks – and feels – like fear, anger, terrorism, fighting, missile launching, and belligerent behavior are on the ascendancy. If the markets rise again along with a more positive social mood, however, we may see the leaders of some nations decide to back down or find a way to conciliate their differences, almost a return to Elvis Costello singing Nick Lowe’s lyrics in 1979, “What’s so funny about peace, love and understanding?”

But if the markets continue to fall, as Prechter predicts via Elliott wave analysis, then the world could be heading in the other direction toward a more dangerous and longer-lasting conflict, maybe even a return to the “Eve of Destruction,” Barry McGuire’s anti-war song from 1965. Remember that one?

“The eastern world, it is exploding
Violence flarin’, bullets loadin’
You’re old enough to kill, but not for votin’
You don’t believe in war, but what’s that gun you’re totin’
And even the Jordan River has bodies floatin’
But you tell me
Over and over and over again, my friend
Ah, you don’t believe
We’re on the eve of destruction.”

Editor’s Note: Susan C. Walker writes for Elliott Wave International, a market forecasting and technical analysis company. She has been an associate editor with Inc. magazine, a newspaper writer and editor, an investor-relations executive and a speechwriter for the Federal Reserve Bank of Atlanta. She is a graduate of Stanford University.