Predicting stock markets through art
During May 2013, art auctioneers in London and other auction houses around the world were somewhat surprised by the record numbers of sales, as well as their values, in art auctions. This behaviour of making impulsive, high purchases on things like art investment, jetting off on international holidays via a private jet, and other high-roller spending patterns have been linked to future changes in the stock market – it’s a financial philosophy that’s been supported by major evidence from the past and is slowly gaining traction in the financial community.
The theory goes that when people make extreme purchases or are very liquid with their money, a stock market slump can be predicted based on their behaviour. This is called “behavioural finance”, which posits that human action is governed by social mood; that behaviours like extreme spending are the result of extreme optimism or fear. Behavioural analysts believe that clues about what would happen to equities could be found in this fear- or optimism-driven behaviour.
Behavioural finance is actually gaining ground as a tool for financial analysis, and analysts are not only consulting traditional polling means, but also looking to social media to gauge behaviour. The other behavioural gauge is the pattern of spending, especially by high-rollers, on non-essentials like expensive new or used cars for sale. The president and CE of Financial Insyghts, Peter Atwater, indicates that the present time is one where markets will soon top, if people’s spending on art, residential real estate, and expensive cars are anything to gauge. A few months ago, an Aston Martin fetched a record-breaking $4.85 million at an auction, while a Christie’s New York art auction set 37 new price records. When the really-rich show a general pattern of spending a lot of money, it’s indicative of market-peak sentiment, after which equities may drop substantially. This analysis is contrary to traditional analysts’ outlook; who are predicting an improved economic outlook, globally, and are expecting new highs in the next few months, in spite of other corrections.
Robert Prechter, who has postulated the “Socionomic Theory of Finance”, says that social mood causes changes and significant events in politics and economics, and not the other way around (which is the traditional sentiment). It may help to add that Prechter correctly predicted the slump of 2007 and the subsequent recovery from the stock bust, in 2009. He and other proponents of his theory are sure that there is a turn in the equity markets which is close at hand, and that there will be no warning when fundamentals change – people won’t be given the chance to sell their stocks.
Many financial experts are seeing socionomic theory and behavioural finance as complementary analysis tools to the more technical analysis – just another arm of trend analysis. It may still be a long time before experts and traditional analysts use these spending patterns as the sole indicators of what’s going to happen to equities.