Why Rising Stocks Are a Buzzkill for Legalized Marijuana

From the Roaring '20s depicted in The Great Gatsby, to the big hair and bright neon of the clubby '80s, America knows how to live it up during times of economic prosperity. Although we've seen some improving economic data (like consumer confidence figures climbing to heights not seen since 2007), and a stock market that keeps pushing higher, clearly the U.S. is doing better but still a long way off from previous boom times. And these boom times are important not just for our wallets, as behavior researchers see economic conditions affecting our “social mood,” which influences our actions and social judgments.

One area that social mood may come into play is our appetite for embracing tolerance and relaxed regulation, a trend that can clearly be seen in marijuana decriminalization efforts. So far 18 states allow marijuana use for medicinal purposes, with Colorado and Washington having recently passed referendums legalizing the use of marijuana for non-medicinal use as well.

[See related: High Returns? Private Investors Funding Marijuana Revolution]

Last month the legislature of Vermont voted to decriminalize small amounts of marijuana possession as well, with the state governor indicating he would sign the law. From an economics standpoint, moves to decriminalize make a lot of financial sense for the states. A report from the state of Colorado shows that the marijuana industry just in Colorado alone is worth north of $600 million, and that excise and sales taxes will result in over $130 million in extra tax revenue for the state in 2014.

However, as strange as it may seem, history has shown that it is in times of economic prosperity that government is more aggressive towards criminalization. Euan Wilson, writer and researcher for the Socionomics Institute, a market and social research think tank affiliated with market forecasting firm Elliott Wave International, discovered this counterintuitive connection between social mood, vis a vis the stock market, and criminalization of drug use.

“To my surprise when I was doing this study, I figured when mood was rising as evidenced by the stock market, people would be more free about things…and legalize drug use,” Wilson says in the attached video. In fact, Wilson discovered “the opposite turned out to be true…rising social mood imbues people with the social willingness to remove social ills like drug use.”

As Wilson points out in his research, in the past 100 years, each of the eleven federal legislative attempts to restrict marijuana use has followed at least three, and in most cases four or five, bull market years.

Conversely, when markets fall, history shows that behavior does to. “People give up on [removing social ills], they’re out of time, they’re out of money, they’re out of patience. So falling social mood will lead to decriminalization of drug use.”

Specifically, Wilson notes the during the height of the Great Depression negative social mood led to the repeal of prohibition in 1933. However, only “five years later, after a five times market rally, they criminalized marijuana for the first time."

As for Colorado and Washington, Wilson says when adjusted for inflation, the current stock market isn't that impressive, and thus social mood may actually still be depressed in certain areas. Since states hold direct elections, Wilson argues state officials are more beholden to the people and must recognize the applicable social moods, and perhaps economic troubles of the states.

The federal government on the other hand is “always the slowest to act due to the intense bureaucracy that it experiences” and with a market that keeps climbing (nominally) higher, entrenched government policy, and varying social mood, the status quo at the federal level is here to stay.

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