By Nicholas Mangee

On May 1, 2024, Federal Reserve Chair Jerome Powell now-famously stated that, “I don’t see the stag or the-flation, actually.” On May 7, 2025, just over a year later, the Fed’s narrative has shifted. Powell, in an about-face, told reporters after the FOMC decided to leave rates unchanged, “If the large increases in tariffs that have been announced are sustained, they are likely to generate a rise in inflation, a slowdown in economic growth, and an increase in unemployment.” The following day, President Trump announced on Truth Social, “Jerome Powell is a FOOL, who doesn’t have a clue….Oil and energy way down, almost all costs (groceries and ‘eggs’) down, virtually NO INFLATION, Tariff Money Pouring Into the U.S….” This tale of two narratives highlights the true uncertainty at play when novel events and unforeseeable change abound.   

How should investors think about the impacts from Trump’s tariff policies on corporate earnings or cash flow prospects? Or the impacts from Fed Chair Powell’s cautionary remarks about future economic stagflation (not to mention the interdependent and higher order impacts of tariffs on subsequent inflation)? Forecasting is hard, especially in the face of novelty and the unforeseeable change it engenders in financial market relationships. The fact remains that the arrival of historical events, which may take weeks, months, or even years to unfold, ushers in a great diversity of possible interpretations for the future. As Popper astutely noted, the future is “objectively open.” Interpretations of events’ relevance and meaning are, in turn, buttressed by narrative thinking and interwoven story threads about key entities and underlying causal relationships. The contextualization of complex real-world phenomena into purposeful forecasting strategies requires as much.    

I introduce the Novelty-Narrative Hypothesis (NNH) as an analytical framework for understanding novel events’ impacts on financial market instability and, in turn, the need for narratives to cope with increased “radical” or Knightian uncertainty. Findings from extensive textual analysis of financial news reports suggest that spikes in the intensity of market narratives align with the timing of structural change in conventional models of stock returns and volatility. Put differently, narratives play a contemporaneous role as historical events trigger fundamental relationships to change in real time. But what do these findings suggest about the role of narratives in stock market forecasting? How might a narrative-based forecasting strategy be applied to help deal with market instability in practical ways? How might the economic value-added from incorporating narratives into forecasting strategies be assessed in comparison to alternative approaches?

This is the objective of my second book, Narrative Analytics and Stock Market Forecasting: How Popular Stories Help Inform Investment Strategies (Edward Elgar Publishers, 2025 https://www.e-elgar.com/shop/usd/narrative-analytics-and-stock-market-forecasting-9781035357598.html). This book focuses on the forecasting component of NNH and its two pillars of relevance realization and contextualized meaning. Narratives are a thematic string of story threads that portrays a simplified, yet subtly changing, view of a larger, more complex relational structure. In oceans of otherwise lifeless data, narratives combat combinatorial explosion by helping to inform which information is the most relevant for corporate prospects and in what ways it matters. Narratives are flexible yet persistent and attach themselves to views about trends in fundamentals, such as earnings and interest rates. Narratives transcend time and, as such, accumulate the characteristics of novel events as they unfold helping to forecast trends in fundamentals and future stock returns and volatility. These are just a few reasons why narrative dynamics are helpful for forecasting in a world of instability and unforeseeable change.   

In the cognitive sciences there is a growing research program centered on the concept of relevance realization as articulated by Vervaeke et al. (2012) and Vervaeke (2020) as an explanatory framework for general knowledge, intelligence, and understanding. Relevance realization is suitable for managing problems that are often ill-defined, for aiding individuals as they confront shifting parameters and genuinely new environments. Relevance implies meaning, but it does not describe the nature of meaningfulness of new information for understanding the future. Bruner (1986)’s “narrative thinking” unleashes a view of the mind that advances beyond the rigidity and inflexibility of systematized and purely logico-inductive syntactic processes. Narratives catalyze and fuel abilities to experientially grow our understanding, albeit ever-imperfect, into what could be reasonably articulated today about future possibilities. Bruner recognizes that the mind’s central cognitive function is “world making” (i.e. meaning making). Simply put, the forecasting component of NNH implies that narratives help shed light on which information matters and in what ways for future corporate outcomes.  

How do narratives help forecast the stock market? One actionable way discussed in the book, and supported with evidence, is to alter portfolio weights based on the intensity of story threads surrounding individual firms. Another approach documented in the book is to interact and augment risk factors with asset-specific narrative intensities. Throughout the analyses, narratives are proxied based on various sources ranging from Google Trends Seach Intensity and the chronicles of corporate news releases to the popular financial press. The book offers both descriptive and empirical findings suggesting that narratives may help explain future stock returns and volatility, improve portfolio performance over time, and reduce the degree of instability in expected return regressions. At the macro level, narratives connected to Presidents Biden and Trump and Federal Reserve Chair Powell display high forecasting performance over various horizons. At the micro level, myriad corporate case studies involving firms such as Moderna, JP Morgan, United Healthcare, Apple, Tesla, and Silicon Valley Bank are presented to show readers the leading temporal role of narratives’ effects on future stock market outcomes. Featured events include highly publicized data breeches, great shifts in corporate capital budgeting projects, technological advancements in AI, mass governmental investment in EV transportation, regional mortgage banking crises, and developments in major clinical and laboratory trials.

Like Mangee (2021), this book is written for academics, policymakers, traders, and other market practitioners with an emphasis on practical application supported by a wide collection of descriptive and empirical evidence. There is practical need for narratives in helping investors cope with streams of unfolding novelty and the subsequent instability that characterizes modern-day asset markets. Narratives are not noise. They are part of rational forecasting under instability and true uncertainty. Prominent researchers and top journals are now seriously considering the contributions of narrative economics to our understanding of financial markets. The scientific turn is recognition that inter-disciplinary frameworks are adding value to the epistemological frontier. And, more specifically, it suggests that narrative economics may provide an alternative way forward in our understanding of asset markets. This book, and its focus on narrative-based forecasting strategies, serves as a step in that direction.

Nicholas Mangee is the Truist Chair in Money & Banking, Faculty Fellow of Scholar and Student Success, and Professor of Finance in the Parker College of Business at Georgia Southern University.

Narrative Analytics and Stock Market Forecasting: How Popular Stories Help Inform Investment Strategies is available in Hardback and eBook.

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References

Bruner, J. 1986. Actual Minds, Possible Worlds, Cambridge, Massachusetts: Harvard University Press.

Bruner, J. 2004. The Narrative Creation of Self. In L.E. Angus & J. McLeod (Eds.), The Handbook of Narrative and Psychotherapy: Practice, Theory, and Research, 3-14.

Mangee, N. 2021. How Novelty and Narratives Drive the Stock Market: Black Swans, Animal Spirits, and Scapegoats. Cambridge, UK: Cambridge University Press. 

Vervaeke, J., Lillicrap, T.P., and Richards, B.A. 2012. Relevance Realization and the Emerging Framework in Cognitive Science. Journal of Logic and Computation, 22(1), 79-99.

Vervaeke, J. 2020. Awakening from the Meaning Crisis – Convergence to Relevance Realization. Episode 28, https://www.meaningcrisis.co/ep-28-awakening-from-the-meaning-crisis-convergence-to-relevance-realization/.