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Myth: News and Events Drive Financial Markets

News – even the most dramatic – does not account for changes in stock prices

by Bob Stokes
Updated: January 10, 2022

You've probably heard the saying that's been around for decades: "As General Motors goes, so goes the nation."

But is it true that "as the news goes, so goes GM's stock price"?

Apparently not.

First, here's a Jan. 4 headline (Reuters):

Toyota dethrones GM as U.S. sales leader after nearly a century on top

Obviously, not the best of news for GM.

Yet, GM's stock price closed more than 7% higher on that very day and traded even higher the next day.

All of this about the news, GM and its stock price is mentioned because many investors believe that the news drives financial markets. However, this is a myth.

The history of financial markets is filled with examples of stocks falling on "good" news and rising on "bad" news.

Let's pick just one from about a year ago.

Consider the big economic news on Dec. 4, 2020 (Marketwatch):

'Job growth has seriously slowed'

As you might imagine, economists expressed widespread disappointment and said the "labor market is losing momentum."

According to the conventional wisdom that investors react to news, stocks should have ended the day lower.

Instead, the Dow Industrials hit a then record-high on that day -- closing 248 points higher.

For an even broader perspective, consider this illustration and commentary from Robert Prechter's milestone book, The Socionomic Theory of Finance:

ExogenousCause

The chart is an idealized representation showing what would be the presumed effects on overall stock prices of a sudden slew of bad earnings reports, an unexpected terrorist attack..., a large "economic stimulus" program, a major contraction in GDP, a government program to bail out at-risk banks, a declaration of peace after a time of war and a significant decline in interest rates. Under this causal model, such events would--rationally and objectively--effect a change in overall stock prices. The problem is, this depiction does not match empirics. That is not how overall stock prices behave.

Actually, the stock market's chart pattern unfolds according to the Elliott wave model, which reflects the repetitive, hence predictable changes in investor psychology.

Again, it's a myth that news and events drive the market's trend.

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