Narrative Cycles: What Drove Postwar Stock Market Dynamic?

Abstract

The United States is considered the world’s leading center of economic power, which, in particular, is determined by the role played by the U.S. stock market in the world economy. Largely due to the capacity of this market, the U.S. dollar plays the role of the dominant world currency. The state of the U.S. financial market is important for global financial stability. This determines the importance of finding the factors that determine the dynamics of the U.S. stock market. In this article, the author offers his chronology of post-war financial cycles in the United States and analyses them in light of the changing social narratives that accompanied these cycles. Reviewing the literature on financial cyclicality and financial bubbles, the author argues that the efficient market hypothesis can be enriched by research from behavioral finance. As the author suggests, stock prices may reflect not only economic and financial information, but also a broader set of information signals. The author proposes to consider narratives as such information signals that can be used by investors in the decision-making process. In conditions of mass influx of retail investors into the market, the importance of narratives as information signals increases and their connection with market dynamics becomes even clearer. The author sets the boundaries of three long-term periods of market development (1949–1974, 1974–2003, 2003–2021) and then analyses these periods to identify distinct phases of market growth and decline. In order to identify such phases, the author uses a simple rule of decreasing minima: in the case of a general growth trend of the stock index, interrupted by its short-term falls (corrections), its minimum value after each correction is greater than the minimum value of the previous correction. The moment when the index falls below the previous minimum value can be considered as the end of the upward phase of the market. According to the chronology of financial cycles proposed by the author, in the entire post-war period there is an alternation of long-term and shortterm periods of growth of stock market quotations. By analyzing their variability, the author concludes that there are relatively stable market patterns that can be repeated in the future. At the same time, the author notes that the influence of non-economic events, in particular geopolitical conflicts and crises, sudden shocks such as a pandemic, weakens the predictive nature of historical cyclicality. In the author’s opinion, under these conditions, the importance of analyzing narratives as information signals increases significantly, as they usually reflect all the key events and phenomena that attract people’s attention.