Future Performance through an Economic Downturn

All the above analysis is retrospective, performed at the time we conducted our consumer survey to identify companies that engender high-value emotions, the summer of 2007. Up to that point, those companies were considered to be high-emotion companies by consumers. Would these high-emotion companies have enough staying power for the index to be predictive of future high-performing stocks?

In 2008, things changed. The world entered a deep recession and the worst economy in nearly a century. Emotion of companies is dynamic. The emotions that are most highly valued in one period may be less valuable in another. In light of the dramatic economic downturn that began the following year, the natural question became how well the high-emotion index would perform through the down economy. A traditional viewpoint might have been that the high-emotion firms would underperform as the economy began to focus on the basics, eschewing unnecessary or “frivolous” emotions.

TABLE 3.1 The percentages of investors that “win” with the high-emotion index.

Figure 3.4 shows the performance of the stock indices for the two years subsequent to our original study. Because our original study concluded at the end of June 2007, the subsequent two years began on Monday, July 2, 2007, and ended on Tuesday, June 30, 2009. When considering the performance of the indices over time, there is a brief time period when the traditional viewpoint wins out. Starting in October 2008, just after the Lehmann and Goldman bankruptcy filings, the high-emotion index fell more sharply than the standard indices.

FIGURE 3.4 Two-year comparison of indices through the down economy.

Looking at March 2009, when the market began heading upward again, the high-emotion stocks far outpaced the standard indices. Overall, looking at the two-year period in Figure 3.4, the S&P 500 lost 39.5 percent, the Dow Jones lost 37.6 percent, the NASDAQ lost 30.3 percent, but the high-emotion index lost only 25.5 percent. Through the worst U.S. economic downturn since the Great Depression, the high-emotion index fared better than the standard indices.

Also of interest in Figure 3.4 is the performance of the low-emotion index, which did very well through the worst part of the downturn. It turns out that the index did quite well because of one company that performed exceptionally well during the downturn: Wal-Mart. Clearly, there are many drivers of stock performance, including sales volume, so it comes as no surprise that Wal-Mart’s stock outperformed market averages during the downturn. Yet, even with Wal-Mart, with its focus on cost and efficiency, emotions are not absent. In the economic downturn, Wal-Mart became the source of salvation for many people, where less money allowed them to still buy needs and some wants. Wal-Mart was the trusted retailer, and consumers flocked to Wal-Mart with the confidence that they were doing the best with their budgets and that they were being looked out for in the financial crunch.

What is quite clear is that Wal-Mart’s stock performed quite well in relative terms, yielding a slightly positive return (0.2 percent) while stock averages lost roughly a third of their value. To assess performance of the typical low-emotion company, Figure 3.5 shows a reduced low-emotion index that omits Wal-Mart, similar to what we did earlier where we omitted Apple and Google to see the effect of these outliers on the high-emotion index.

The reduced low-emotion index still performs decently, no worse than the standard indices, but no better either. Most importantly, the high-emotion index performed quite well through the downturn, better than the full (or reduced) low-emotion index, better then the Dow, better than NASDAQ, and better than the S&P 500. Even in a down economy, emotion pays off for companies and their shareholders.

Although our stock index showed stellar past returns most of the time, the goal of our analysis was not to find a high-performing stock index. Rather, we started with a theory, and we subsequently analyzed stock performance to confirm that our theory played out in reality. Our goal was to use this study to verify in practice that it is truly profitable for companies to create products that engender positive emotional responses. We believed that if consumers value emotion, we could expect companies that provide exceptional levels of emotion to outperform those that do not. Using stock market returns, we found exactly the result that the theory would lead one to expect: high-emotion firms outperformed quality firms that deliver lower levels of emotion and the standard indices. For firms that deliver valued emotions, practice matches the theory.

FIGURE 3.5 Two-year comparison of reduced low-emotion index to other indices through down economy.