Myth: News and events drive financial markets :: Elliott Wave International

You’ve probably heard the saying that’s been around for decades: “As General Motors does, so is the nation.”

But is it true that “as the news comes, GM’s share price is also moving”?

Apparently not.

First up, here’s a headline from January 4 (Reuters):

Toyota dethrones GM as US sales leader after nearly a century at the top

Obviously, this isn’t the best news for GM.

Still, GM’s share price closed over 7% higher the same 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 news drives financial markets. However, this is a myth.

The history of financial markets is replete with examples of stocks falling after “good” news and rising after “bad” news.

Let’s pick one from about a year ago.

Consider the big economic news for December 4, 2020 (Marketwatch):

“Job growth has seriously slowed down”

As you can imagine, economists have expressed widespread disappointment and said “the labor market is losing momentum”.

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

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

For an even broader perspective, consider this illustration and commentary from Robert Prechter’s landmark book, The socio-economic theory of finance:

The graph is an idealized representation showing what would be the alleged effects on global stock prices of a sudden series of bad earnings reports, an unexpected terrorist attack …, a massive “economic stimulus” program, a major contraction in GDP, a government bailout program for risky banks, a declaration of peace after a period of war and a significant drop in interest rates. In this causal model, such events would – rationally and objectively – have an effect on the overall stock price. The problem is that this description does not match the empirical ones. This is not how stock prices behave overall.

In fact, the chart pattern of the stock market is proceeding according to the Elliott wave pattern, which reflects repetition, therefore predictable changes in investor psychology.

Again, it is a myth that news and events determine the market trend.

Get our latest Elliott Wave information on the stock market trend by following the link below.