How Stories Drive the Market

Most people with a link to financial markets know that stock markets are not just driven by cold, hard numbers, popular narratives about market trends often have investors buying in — even when the data doesn’t support them. IR professionals need powerful communication tools in order to take ownership of these stories.


Ask any serious stock market investor what their motto is, and the answer isn’t likely going to be, “shoot for the fairy tale ending.” Why not? Because market forces are driven by numeric trends like currency rate fluctuations, commodity futures pricing dips, and public valuations, not by narrative twists and compelling stories.


The factors that drive the economy are calculable and, therefore, predictable. As such, any valuable investor opinion should be rooted solely in objective, data-driven evaluation, right?


In reality, that’s not always how it works — stories and popular sentiment can have a dramatic impact on the stock market. Our supposedly cold and scientific perspective can be easily swayed by the popular narratives that surround emerging companies, market trends, and our confidence in them.


Of course, that tendency wouldn’t be a problem for investors and companies if these narratives didn’t turn out to be so frequently wrong.


This Little Piggy Goes to Market

In a fascinating New York Times article, Nobel Prize-winning economist Robert Shiller explores how stories and sentiment can lead investors astray, causing a cascade of self-fulfilling prophecies that leads investors to downplay or ignore market indicators.


Shiller first turns to the current market uneasiness surrounding the Dow’s rocky opening at the start of 2016, a narrative that MarketWatch’s Ivan Martchev compared to a “house party gone bad.” He observes that, in reality, there’s no special reason why we should pay close attention to year-opening weeks when calendar years themselves are somewhat arbitrary fictions, untethered to tangible market performance. If investment behavior were aligned with the lunar or ancient Roman calendar instead, would it have a tangible effect on market behavior?


Another misleading market narrative is that of the rapid rise and subsequent pummeling of American fracking companies. The narrative, which first touted the triumph of American ingenuity — that frackers could lower sky-high oil prices by cultivating domestic sources — has since collapsed on itself. As more sober analysts predicted, oil prices have reached record lows, a trend that has had the unexpected effect of deep cuts into fracking industry profits.


One final narrative concerns the painful irony that, as investors jumped ship following the 2008 crash and its subsequent Recession, those who had enough foresight (or funds) to remain in the market made out handsomely as the economic tide eventually rose. As Shiller notes, this has led to the perception that investors are more easily swayed than once thought, a perception that is itself an unsubstantiated notion about the stock market that will influence investment behavior.


Today, these stories matter — critical for ensuring that public companies are fully valued and engender perceptions of strength in the eyes of investors — and companies must take ownership of them.


Clear Communication Dispels Myths

In today’s hyper-connected market, investors and key stakeholders are bombarded by a constant stream of narratives from dozens of channels, causing any number of unintended effects. Those stories can shift overnight, which means that IR professionals must be able to reach stakeholders first. The only way you can increase your chances of making first contact is by opening and maintaining strong channels of communication.


New technologies, such as branded IR mobile apps, have granted IR teams new power to cut through the buzz and provide much-needed corporate clarity. Via tailored alerts and push notifications, IR teams can now reach key stakeholders at pivotal moments in a story, providing a direct link to the facts and data before the stock market rumor mill spins a narrative out of control.


Stories are indeed poor indicators of company strength, but as a Motley Fool headline observes, “Stories drive the stock market over the short term, but long-term investors need to be able to weave stories of their own.” Mobile apps empower IR professionals to provide the right thread, ensuring that the weave becomes a blanket — not a mess of crossed wires.




(Main image credit: Olu Eletu/Unsplash)