Historical context and markets

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Look at a painting, and you can have a view of whether you like it or not. Something might catch your eye, perhaps it’s the style of painting. Maybe it’s the colours. Could it be the subject topic? However, without any context about the artist and the period in which it was painted, it can be more challenging to gauge whether there is a deeper meaning within the painting. Without any context, any view about a painting, is going to focus on the superficial elements which can immediately be seen (and that’s usually where my “analysis” kind of stops of art, because I haven’t got much background knowledge in this area!).


Context is obviously not purely important in the understanding of art, but also in understanding politics. I’ve recently been reading a biography by Robert Caro of former US President Lyndon B Johnson, which is split into 4 volumes, which cover LBJ’s life from his childhood to the early 1960s (the 5th volume covering the last part of his life is currently being written). It’s an extremely well written series of books and I’m getting close to the end of the 4th volume. A key part of Caro’s biography, is discussing how the context of LBJ’s upbringing impacted how his politics developed. More broadly, trying to understand a country’s politics is incredibly difficult, without understanding its history as context. It’s one of my main motivations for reading LBJs biography and quite a few other books on US history to better understand the country today. I have to admit I still have quite a few gaps in my knowledge of US history, and I’m hoping to fill them over the coming years, but reading more. As an aside, any recommendations about your favourite books on US history would be very welcome!


When we look at markets, it can be tempting simply to look at time series in isolation, without the context. I recently saw read an article, by Mr Risk (also¬†known as Fred Goodwin) from State Street, discussing the price action in equity market at present, comparing it to another period in the early 60s. The context was that of price action in markets towards the beginning of a President’s term (in this case JFK compared to Trump). It got me thinking more broadly about context when looking at markets (and this is a topic which was behind my book, which I published a few years ago, Trading Thalesians – What the ancient world can teach us about trading today). Plot the S&P500 over the past century, and you’ll see dips and rallies. For moves in recent years, whilst I’ve been working in markets, my memory tries to fill the blanks, explaining what went on in their undulations. However, I certainly haven’t been working for a century, so there’s quite a bit of history which appears to be just numbers to me when I look at the time series, with the exception of certain well known episodes, such as the crash in 1987, the Great Depreciation or the dotcom crash.


I actually asked a question about this on my Twitter feed about this. One my Twitter followers (@DavidTaggart) suggested reading “101 Years on Wall Street – An Investors Almanac” (Amazon page) which discusses the various bull and bear markets since 1890. For more recent history @GeraldRushton suggested the news feature on Bloomberg. You can bring up any chart, and a click at any point in time (at least since the 1990s), will show you major news articles at the time. We could also try to do it in an automated way, which @GeraldRushton alluded too, using machine readable news histories in a more automated manner, to pull out what were major topics in during the history of the market.


I’m not suggesting that market practitioners suddenly start scouring history books or become economic historians to magically find trade ideas. It’s just that context can be useful in understanding what went on in markets. For quants, understanding how certain events impacted markets, can also be useful for understanding different scenarios for a model. It’s also important to understand how the structure of markets changed. Sometimes, without context, it can become difficult to answer that most difficult of questions in markets… why!