Stock market hatred has risen at an alarming rate during the last 5 years, especially after the financial crisis. Partly, this alarming phenomenon is due to the news media pointing the blame for the crisis mainly on those who issued the subprime loans and not also on those who got them. This was an unfair handling of the whole situation by the media that has contributed to stock market hatred. But, in my opinion, the main reason behind this hatred is the fact that food and gas prices rise when the market rises and fall when it falls.
This correlation, which actually emerged before the financial crisis, has driven the average Joe to believe that the stock market, the flagship of Wall Street, is the cause of all evil and as a result he hates it and he wishes it falls hard so that he can see lower gas and food prices. This correlation is evident from the monthly CRB – SPY chart below:
It may bee seen that commodity prices (CRB index – black line) started rallying in 2003 along with the stock market (SPY - pink line) and made a top in 2008, just before the final stages of the stock market collapse. It is also evident from the chart that as soon as the stock market bottomed in early 2009, so did commodity prices, which then followed the market to its 2011 highs and during the subsequent correction. Now that the market is rising above its 2011 highs, commodity prices have also started to rise.
The above chart shows extended consecutive periods of time during which commodity and stock prices are highly correlated and this has already been etched in people’s mind. The average Joe in the street has not read David Hume and others after him and he does not understand that correlation does not imply causation. The average Joe in the street is looking for a causal explanation each time he spots a correlation. He does not understand that it may be the exact opposite that is happening, i.e. that it may be the rise in commodity prices, caused by increased consumption mainly in Asia and elsewhere, that causes the rise in stock prices due to increasing economic activity and that causes a revaluation of stock prices to reflect future expectations No, the stock market and Wall Street are the easy target. “What causes the mess with the rising prices at the gas pump and the supermarket? Wall Street does, hate them…”.
Regrettably enough, the average Joe in the street does not understand that in this way he is paving the road to the destruction of a financial system that was designed for his own benefit. If companies cannot raise money from Wall Street any longer because people just hate it and do not participate, they will pull out and become private again. Signs of such a trend emerging are appearing on the horizon. Then, the average Joe who hates the stock market will be left with no prospects of corporate profit sharing – a form of social capitalism – and share investing will be possible again only for the very wealthy. Food and energy prices will still rise in concert probably but the only difference will be that the average Joe will be out of the game.
Disclosure: no relevant position at the time of this post.
Charting program: Amibroker (Charts created with AmiBroker – advanced charting and technical analysis software. http://www.amibroker.com/”)