Robert Prechter Dispels 10 Popular Investment Myths, Part VII

Home > Stocks
Robert Prechter Dispels 10 Popular Investment Myths, Part VII
The world's foremost Elliott wave practitioner tests economists' "Claim #6: 'Wars are bullish/bearish for stock prices.'”

By Vadim Pokhlebkin
Wed, 22 Dec 2010 10:30:00 ET

Get investable insights sent to your inbox at least once a week – for free. Challenge the way you think about investing with The EWI Independent.

Privacy

This is Part VII of the series "Robert Prechter Dispels 10 Popular Investment Myths," where EWI president explains why traditional financial models failed -- and why they are doomed to fail again (and again). (Excerpted from Prechter's February and March 2010 Elliott Wave Theorists.)

Here are Part I, Part II, Part III, Part IV, Part V and Part VI; come back next week for Part VIII.

The Socionomic Theory of Finance

The Conventional Error of Exogenous Cause and Rational Reaction

By Robert Prechter

... If the stock market is not reflecting macroeconomic realities, what else could it possibly be doing? Well, how about political news? Maybe political events trump macroeconomic events.

Testing Exogenous-Cause Relationships from Political Events

It is common for economists to offer a forecast for the stock market yet add a caveat to the effect that “If a war shock or terrorist attack occurs, then I would have to modify my outlook.” For such statements to have any validity, there must be a relationship between war, peace and terrorist attacks on the one hand and the stock market on the other. Surely, since economists say these things, we can assume that they must have access to a study showing that such events affect the stock market, right?

The answer is no, for the same reason that they do not check relationships between interest rates, oil prices or the trade balance and the stock market. The causality just seems too sensible to doubt.

Claim #6: “Wars are bullish/bearish for stock prices.”

Observe in the form of this claim that you have a choice for the outcome of the event. Recall my point that you can argue either side of an exogenous-cause case. Economists have in fact argued both sides of this one. Some have held that war stimulates the economy, because the government spends money furiously and induces companies to gear up for production of war materials. Makes sense. Others have argued that war hurts the economy because it diverts resources from productive enterprise, not to mention that is usually ends up destroying cities, factories and capital goods. Hmm; that makes sense, too. Apparently the way that a war would change an economist’s stock-market outlook depends upon which version of the exogenous-cause argument he believes.

I will not take sides here. We can negate both cases just by looking at a few charts. Figure 11 shows a time of war when stock values rose, then fell.

Figure 12 shows a time of war when stock values fell, then rose.

Figure 13 shows a time when stock values rose throughout.

Figure 14 shows a time when stock values fell throughout.

Who wins the war seems to mean little, either. A group of Allies won World War I as stock values reached 14-year lows; and nearly the same group of Allies won World War II as stock values neared 14-year highs. Given such conflicting relationships, why and how, exactly, does an economist expect war to affect his economic forecasts?

[Part VIII is now posted: Robert Prechter tests economists' “Claim #7: 'Peace is bullish for stocks.'”]

Latest from Prechter: The December Elliott Wave Theorist updates you on the stock market, gold, silver and shows you several stunning charts, including one with a reading so extreme it hasn't been seen in 45 years. Subscribe risk-free now for instant online access.

Tags: Bear market, bull market, Efficient Market Hypothesis (EMH), Elliott Wave Principle, fundamental analysis, Robert Prechter, Random Walk Theory, social mood, socionomics

May 13-16

Las Vegas Money Show

July 10-13

Freedom Fest Conference

Stay Ahead of the Trend in U.S. Stocks

EWI's Financial Forecast Service equips you to think, trade and invest independently from the crowd. Here's what you'll get, risk-free:

Short Term Update -- Intensive forecasts and analysis 3x/week for U.S. stocks, gold, silver, bonds and the U.S. dollar.
Financial Forecast -- In-depth, intermediate-term perspective on U.S. stocks, gold, silver, bonds and the U.S. dollar.
Theorist -- Bob Prechter's monthly big-picture insights.

Put the Financial Forecast Service on your screen in minutes, risk-free>>

Most Read

Highest Rated

Free Video Course

Learn the Why, What and How of Elliott Wave Analysis

Financial media use news and economic events to explain market moves. Steer clear of this misguided approach. Take part in the Elliott Wave Crash Course to learn what really moves the markets.

The Elliott Wave Principle is a detailed description of how financial markets behave. The description reveals that mass psychology swings from pessimism to optimism and back in a natural sequence, creating specific Elliott wave patterns in price movements. Each pattern has implications regarding the position of the market within its overall progression, past, present and future. The purpose of Elliott Wave International’s market-oriented publications is to outline the progress of markets in terms of the Wave Principle and to educate interested parties in the successful application of the Wave Principle. While a course of conduct regarding investments can be formulated from such application of the Wave Principle, at no time will Elliott Wave International make specific recommendations for any specific person, and at no time may a reader, caller or viewer be justified in inferring that any such advice is intended. Investing carries risk of losses, and trading futures or options is especially risky because these instruments are highly leveraged, and traders can lose more than their initial margin funds. Information provided by Elliott Wave International is expressed in good faith, but it is not guaranteed. The market service that never makes mistakes does not exist. Long-term success trading or investing in the markets demands recognition of the fact that error and uncertainty are part of any effort to assess future probabilities. Please ask your broker or your advisor to explain all risks to you before making any trading and investing decisions.