Last Friday, November 1, Fox Business said “US economy added 12K jobs in October, well below economists’ expectations.” Sounds bad, right? So, of course, the Dow Industrials rallied 450 points intraday. Economic news – good or bad – doesn’t govern the trend of the stock market. Read this excerpt from Robert Prechter’s book, The Socionomic Theory of Finance:
Suppose you knew for certain that GDP would be positive every single quarter for the next 3¾ years and that one of those quarters would surprise economists in sporting the strongest quarterly rise in GDP over a half-century span. Would you buy stocks?
If you had acted on such knowledge in March 1976, you would have owned stocks for four years in which the DJIA fell 22%. Near the end of Q1 1980, had you realized that both the current and the next quarter’s GDP would be negative, and you thought that development would be bearish, you would have sold stocks at the bottom.
Suppose you possessed guaranteed knowledge that the next quarter’s GDP would be the strongest over a span of 15 years. Would you buy stocks?
Had you anticipated precisely this event for Q4 1987, you would have owned stocks for the biggest stock market crash since 1929. GDP, moreover, was in the middle of an extended period of expansion, turning in a positive performance every quarter for thirty straight quarters—twenty before the crash and ten thereafter. But the market crashed anyway. Three years after the start of Q4 1987, stock prices were still below their level of that time despite ten more uninterrupted quarters of rising GDP. The chart below shows these two events:
It seems that there is something wrong with the idea that investors rationally value stocks according to expansions and contractions in GDP.
Much of the time, GDP and stock prices are allied. But if exogenous causality reigned in this realm, they would always be allied. They aren’t. In fact, they are often diametrically opposed.
If news doesn’t govern the trend of the stock market, what does? The answer is investor psychology, as reflected by Elliott waves. Learn what Elliott waves are saying about the stock market’s next big move as you review our flagship services at a special combo price (includes the just-published November Elliott Wave Financial Forecast)!
If you’d like to learn about other stock market myths, you can get free access to the first two chapters of Robert Prechter’s landmark book, The Socionomic Theory of Finance, by following this link.