This is Part VIII of the series "Robert Prechter Dispels 10 Popular Investment Myths," where EWI president explains why traditional financial models failed in the 2007-2009 financial crisis -- and why they are doomed to fail again (and again). (Excerpted from Prechter's February and March 2010 Elliott Wave Theorists.)
The Socionomic Theory of Finance
The Conventional Error of Exogenous Cause and Rational Reaction
By Robert Prechter
...Claim #7: “Peace is bullish for stocks.”
Most people would not argue that peace is bearish for stock prices. It would seem logical to say that peace allows companies to focus on manufacturing goods, providing services, innovation and competition, all of which helps the overall economy. But does peace in fact have anything to do with determining stock prices?
Figure 15 provides an example of peaceful times -- the 1920s -- in which stock prices seemingly benefited. After all, they rose 500% in just eight years, as there was mostly peace around the globe.
Figure 16, however, shows that in the time immediately following, stock prices lost 89% of their value. During this time as well, there was mostly peace around the globe. Yet stock prices fell more in under three years than they had gained in the preceding eight years!
It seems that we cannot count upon any consistent relationship between peace and stock prices, either. ...
P.S. For the very latest from Bob Prechter, see his December Elliott Wave Theorist, which updates you on the stock market, gold, silver and shows several stunning charts, one with a reading so extreme it hasn't been seen in 45 years. Subscribe risk-free now for instant online access.