A few years before the Great Depression, an economics graduate student named George W. Taylor noted that skirts and the economy tended to be hiked up and let down at the same time. His theory proved prescient within a decade, as both the market and hemlines plunged to the ground.
Since then, new theories linking financial conditions and popular culture have emerged, with everything from the weather to popular music eyed as economic indicators.
Some of these connections appear purely coincidental, such as the notion that whenever a team descended from the original National Football League wins the Super Bowl, the market will go up. This theory has been right 79% of the time, though it missed last year, as the Giants surprised everyone by winning, and the markets surprised everyone by tanking. (One optimistic note: Both remaining teams this year are from the old NFL, so no matter who wins, the market should rise.)
Other links, however, don’t seem so arbitrary. In fact, it may shock you how much statistical and economic significance they have, and how much they’re based on actual social science. The most obvious link is psychology, specifically mood. The same humans occupy both the trading floor and the dance floor: today’s investors are last night’s partiers. The fields of behavioral and experimental finance have found dozens of market anomalies that are best explained only by discarding the traditional, unemotional, calculating models of humanity.
George Taylor wasn’t just a typical grad student lounging around looking at women’s skirts: he wrote his Ph.D. dissertation on labor relations in the hosiery industry. His uncle owned a textile plant and his father was a superintendent at a hosiery mill. For ten years, he was the impartial arbiter for the agreement between the Full Fashioned Hosiery Manufacturers of America and the American Federation of Hosiery Workers. He held a similar position between the employers and employees of clothing manufacturers for another few decades.
The hemline theory was based on the idea that women would want to signal the quality of their expensive stockings more in prosperous times than in difficult times. It has broadly held up over the eight decades since Taylor first noted it.
Another economic indicator is the weather. Recent research makes the case that about half of the excess daily return on relatively colder days comes from the temperature itself, as traders become more aggressive. Sunshine too seems to have some positive effect, even though investors trade in windowless, climate-controlled rooms. In other words, get ready for a market rally on cold but sunny days.
My own recent research into chart-topping music also relies on mood as the middleman. The results suggest that “beat variance” is related to market volatility. Beat variance is a measure of how much the beat of a song varies: songs with low beat variance, like the 1985 hit “Take On Me” by A-ha are very steady, while songs with high beat variance, like the 1968 hit “Revolution” by the Beatles, have beats that change within the song. As a rule of thumb (or neck), if you find yourself nodding along to a piece of music, that’s probably a low beat variance song.
While most attempts to link economic conditions and popular culture use market returns or recession points, I wanted to use volatility, because I think it better reflects the ambient mood of the period. You could have a year where January through November were down months and have a single positive December bring the entire year into the black, and so call that a “bull” year, but for people living through it, it did not feel very bullish.
Volatilities, on the other hand, do seem to reflect life as it was lived: 2008 was a volatile year not simply because of one or two days, but because you and I felt the need to check the value of the Dow Jones every day. Volatility also tends to persist and can be estimated with better precision than returns.
And the same holds for music, too. A song can be fast or slow on average but still have a steady beat. Try listening to a bunch of low beat variance songs for a while: it seems like you could do it forever, and one tune blends in with the next. Think Ace of Base or Billy Idol. But try listening to a bunch of high beat variance songs and you get a headache, or at least I do. Think Ray Charles’ “Georgia on My Mind” or Barbra Streisand’s verbal acrobatics. The complexity makes it harder for me to readjust to the next song.
It seems that the beat variance and the market volatility are negatively related. In times of market turbulence, we listen to steadier music, like “Part Time Lover,” a hit for Stevie Wonder in 1985, and in times of market steadiness, we prefer more complex music, like “A Moment Like This,” Kelly Clarkson’s 2002 hit.
So which came first, the market chicken or the pop culture egg? Perplexingly, it seems that musical preferences for steadiness, if anything, precede periods of market volatility.
In fact, most of these pop culture shifts come before economic changes. Cooler morning temperatures result in higher returns during trading hours. And perhaps most remarkably, according to my colleague F. David Mulcahy in the anthropology department at NYU-Poly, hemlines began dropping from their peak at the knee nearly four years before the 1929 crash. We sense the winds shifting even before the markets do.
Overall, the evidence for links between the economy and pop culture is perhaps stronger than the evidence for links between the economy and increased government spending. In other words, rather than building bridges to nowhere, buying bad assets, and bailing out failed companies, the incoming administration would be equally well-advised to enforce mini-skirts on all women and continuous hits by Alicia Keys to jump start the economy.
Dr. Phil Maymin is an assistant professor of finance and risk engineering at the Polytechnic Institute of New York University and the author of “Yankee Wake Up.” His email is phil@maymin.com.