i dunno, it's hard to make a reasonable and consistent storyline for a game that's basically just "erryone FITIN"
Considering what the first smash game showed, I imagine all of the characters are being used as toys pretty much and its pretty much a kid playing with them imagining they're actually battling like what we see.
Like I'm sure most of you guys always pulled out like one of your action figures or somethings and started to imagine it and something else fight when you were younger, so imagine it like that.
and Master hand and crazy hand would be the kid using their own hands as "opponents" I guess.
Though idk what The master core represents.