Can You Spot the One Financial Myth From This List?

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Can You Spot the One Financial Myth From This List?
Exposing widely-held but false notions about financial markets and the economy

By Bob Stokes
Tue, 24 Apr 2012 17:45:00 ET

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Over the years, EWI publications have worked to help subscribers separate myths from realities about financial markets and the economy.

Of course, the majority of investors still believe them. Why? Well, mainly because of repetition. A myth repeated often enough is typically accepted as true.

But we've taken the time to investigate; we've delved into the facts.

Mind you, I'm not talking about cherry-picking. I'm talking about objective analysis of the evidence over extended time periods.

Let me give you a quick example:

The standard presumption is that the state of the economy is a key determinant of the stock market’s trends. All day long on financial television and year after year in financial print media, investors debate the state of the economy for clues to the future course of the stock market. If this presumed causal relationship actually existed, then there would be some evidence that the economy leads the stock market. On the contrary, for decades, the Commerce Department of the federal government has identified the stock market as a leading indicator of the economy, which is indeed the case.

If the standard presumption were true, then changes in the economy would coincide with or precede trend changes in aggregate stock prices. However...changes in the economy coincide with or follow trend changes in aggregate stock prices. Except for the timing of the recession of 1946 (which supports neither case), all economic contractions came upon or after a downturn in aggregate stock prices, and all economic recoveries came upon or after an upturn in aggregate stock prices. In not one case did a contraction or recovery precede a change in aggregate stock prices, which would repeatedly be the case if investors in fact reacted to economic trends and events. This chronology persists back into the nineteenth century as far as the data goes.

Elliott Wave Theorist, November 1999

So it's a myth that the economy leads the stock market. The opposite is true: the stock market leads the economy.

In the list below, all of the statements are true except one. Can you pick out the myth?

1. Some of the most severe price declines have occurred after the market has reached an extreme oversold condition.

2. Most investor portfolios were worth less at the end of the 1990s bull market than at the start.

3. The best time to own silver is when the economy is expanding.

4. Higher oil prices are detrimental to the economy.

5. Professional money managers are just as susceptible to "crowd psychology" as the average investor.

6. The market determines the trend of interest rates, not the Federal Reserve.

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Tags: Elliott wave, Interest Rates, investor psychology, market myths, personal finance, Robert Prechter, stock indexes, U.S. Federal Reserve (the Fed)

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