Why does the stock market keep rising when America goes up in flames?

While, as our read­ers are aware,¹ we derived from recent stock mar­ket micro behav­ior that there was a sig­nif­i­cant risk for a fur­ther stock mar­ket melt-up (and since we pub­lished our post, the S&P 500 is up more than three per­cent once again), this addi­tion­al ascent seems, on the face of it, lit­tle less than “sur­pris­ing” giv­en that news head­lines are dom­i­nat­ed by vio­lent unrest not only in the United States but around the world.

Is appears lit­tle dared to note that the direc­tion of the vio­lence goes, in some ways at least, against the rule of law, specif­i­cal­ly as one promi­nent demand by pro­test­ers, already start­ing to be heed­ed in part by pub­lic insti­tu­tions, is to “defund the police”.²

The rule of law, accord­ing to the log­ic of the mat­ter, is an essen­tial require­ment for attract­ing and enabling invest­ments, as invest­ments require the abil­i­ty to plan far into the future. Productivity gains and with them an increase both in cor­po­rate prof­its as well as in the aver­age stan­dard of liv­ing require invest­ments. So why would the stock mar­ket rise in the face of efforts to under­mine invest­ments, pro­duc­tiv­i­ty, prof­its and over­all soci­etal wealth?

Possibly, just pos­si­bly, because those risk­ing their own mon­ey in finan­cial mar­kets (need to) try to incor­po­rate as much dis­persed pieces of crit­i­cal infor­ma­tion as at all pos­si­ble in a log­i­cal­ly con­sis­tent man­ner – the tra­di­tion­al mean­ing of “to spec­u­late” – in order to make prof­itable deci­sions. And maybe a slight major­i­ty of finan­cial mar­ket par­tic­i­pants has tak­en notice of research show­ing that “Extreme protest actions reduce pop­u­lar sup­port for social move­ments.”³

Investors might “spec­u­late” that the more vio­lent the protests tar­get­ing – to some extent at least – the rule of law, the less like­ly it may become that the Republican pres­i­den­tial can­di­date who appears to have said that he “wants law and order” will lose his bid for reelec­tion in November. This may appear to be “thought around two cor­ners” if you will, but sci­ence always needs to ask for expla­na­tions for observed phe­nom­e­na. Investors typ­i­cal­ly hate uncer­tain­ty and, there­fore, unrest. But as is so often the case, the rea­son­able answer to a ques­tion may once again not be one of “either/or” but rather of “how much”, may hinge on the log­i­cal cat­e­go­ry of mea­sure. Chaotic sys­tems such as those gov­erned by mass psy­chol­o­gy do not behave in lin­ear ways but promi­nent­ly exhib­it the core con­stituent of actu­al log­ic: the (often sud­den) change of a giv­en qual­i­ty, medi­at­ed by mea­sure, into its (own) opposite.

1. https://loico.com/unprecedented-methodology-of-analysis/[↩]
2. https://edition.cnn.com/videos/us/2020/06/07/minneapolis-city-council-intent-to-disband-police-department-nr-vpx.cnn[↩]
3. https://psycnet.apa.org/record/2020-02398-001[↩]