Mood In The Middle East:
A Historical Perspective

by Mark Galasiewski, Editor of The Asian-Pacific Financial Forecast
Originally published in the Dec. 2010 Socionomist

Astute observers can see that the stock market leads the economy: After stock prices rise for some time, economic conditions usually improve, and falling stock markets precede economic weakness. But deeper analysis reveals that the stock market is also a leading indicator of a whole range of social trends. Our studies show that equities markets are a kind of barometer of social mood. Inclusionist social developments, for example, tend to follow periods of rising stock prices and exclusionist events tend to erupt after prices have declined significantly. This article illustrates that relationship using contemporary historical examples from the Middle East.

The chart above shows major social events in the Middle East in conjunction with the S&P 500, the Tel Aviv 100 and the Amman General stock price indexes. These stock indexes reflect the social moods in the United States, Israel and the Arab world, respectively. The Jordanian stock market is a useful indicator of pan-Arabian mood because it is the oldest continually traded Arabian market and the others tend to trend with it. Inclusionist events are displayed above the price lines, and exclusionist events below them. As you can see, the events noted on the chart generally express the previously rising or falling trends in social mood for each society. Socionomics Institute founder Robert Prechter calls this the socionomic hypothesis.

For example, notice the timing of the start of the Gaza War, which erupted in late 2008 after declines of more than 50% in both the Israeli and the Jordanian indexes. Such behavior makes sense from the perspective of trends in social mood: When mood trends toward the negative, it shows up immediately in falling stock prices. Then, as fear and anger strain weak relationships, conflicts eventually erupt. The opposite dynamic is at work when the social mood is rising or near peaks. For example, just three years earlier, in the middle of the 2003-2007 rally in the Tel Aviv 100, Israel’s goodwill toward the Palestinians rose to such a high level that the government voluntarily decided to dismantle Jewish settlements in Gaza and to withdraw its forces from the territory.

When mood is positive in one society and negative in another, the results are also compatible with the socionomic hypothesis. For example, long periods of rising social mood in both Israeli and Arab societies paved the way for the Oslo Accords in 1993. In July 2000, one month from the end of a five-and-a-half-year bull market in the Tel Aviv 100, the leaders of Israel and Palestine held a similar summit at Camp David in the United States. But, this time, the Arab index was near the end of a two-year bear market (the low end of an eight-year trading range), and the two sides walked away without shaking hands.

Two months later—and four trading days from the end of the Arab index’s correction—the violent events that would later be labeled the start of the Second Intifada erupted. One year later, on September 11, 2001, with social mood as reflected by the Amman Index still very negative, Arab militants executed a mass suicide attack on targets in the United States.

The chart above uses historical data provided by Global Financial Data to offer a more detailed view of Israel’s actions in relation to its Arab neighbors since 1948. As with the earlier chart, this figure displays inclusionist actions above the price line and exclusionist actions below it. It shows events that support the socionomic hypothesis in black and those that do not in gray. The chart displays 13 major historical events from the period that should be prominent in the minds of all Israelis. Of the 13 events, 11 appear to agree with the socionomic hypothesis; only two seem to counter it. One possible explanation for the exceptions is that in the early 1980s most of the world—in particular the United States, Israel’s main ally—was nearing the end of the largest bear market since the Great Depression; therefore its effects may have influenced Israel’s decisions.

The important point to take from the charts is the relationship between the price trends and the events. Most people believe that the nature of social events determines society’s mood—and thus the direction of stock prices. Our studies lead to the opposite conclusion: that changes in social mood—as measured by the stock market—determine the nature of ensuing social events.

The weekly bar chart above shows how strongly mood and events can align even in the short term. It shows all the violent events listed on Wikipedia’s “Arab-Israeli Conflict” page since the bear market in Arabian stocks began in late 2005, charted against our Israeli and Arab mood meters; all of these events occurred after declines in the stock market and thus are compatible with the socionomic hypothesis. The chart also explains many other incidents of violence that originated in the region, such as the attack by a Jordanian suicide bomber that killed seven CIA officers in Afghanistan in December 2009 and the increase in activities by al Qaeda in the Arabian Peninsula (AQAP) since early 2009, which include:

• the drive-by shooting at a U.S. military recruiting office in Little Rock, Arkansas in June 2009;
• the suicide bombing attempts on tourists in Yemen and a Saudi royal in March and August 2009, respectively;
• the attempted 2009 Christmas day bombing of Northwest Airlines flight 253 by a Nigerian man who had plastic explosives sewn into
his underwear;
• suicide bombing and rocket attacks on British targets in Yemen in April and October 2010; and
• the October 2010 cargo plane bomb plot.

In November, AQAP publically outlined its strategy—called Operation Hemorrhage—which calls for inexpensive, small-scale attacks against U.S. interests designed to “bleed the enemy to death” (Inspire Magazine, an AQAP newsletter; see related article on page 4).

The November 2010 issue of The Asian-Pacific Financial Forecast called for significant rallies in Arabian stock markets based on corrective patterns that completed at their 2010 lows (contact EWI Customer Service for a copy). And, because mood is often most exclusionist following the end of major corrections, we expect increased violence in the region soon.

[Ed. Note: Portions of this essay were originally published in The Asian-Pacific Financial Forecast in 2008 and 2010.]