On the morning of May 2, the financial headlines were abuzz
with the news of Osama Bin Laden’s death and its positive
impact on the stock market:
“Stock Market Celebrates Killing of Bin Laden” (The
Wall Street Journal)
But despite a positive open, stocks closed lower on May
2. Undoubtedly, in the days ahead we’ll hear analysts explaining
how Bin Laden’s death is not that “bullish” of
an event, after all.
On that same note, MarketWatch.com ran an interesting
story on May 2 that quoted from a research paper which found “little
evidence that non-economics events have a big effect on the
stock market.”
Here at EWI, we go one step further and say the following: Economic
events have little impact on the stock market, too.
Don’t believe us? Read this excerpt from a free Club EWI
resource, the 50-page 2011
Independent Investor eBook, and judge for yourself.
The Independent Investor eBook, 2011 Edition
(Excerpt; full
report here)
…Economists’ Claim #5: “GDP drives stock
prices.”
Suppose that you had perfect foreknowledge that over the
next 3¾ years GDP would be positive every single quarter
and that one of those quarters would surprise economists
in being the strongest quarterly rise in 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%.
If at the end of Q1 1980 you figured out that the quarter
would be negative and would be followed by yet another negative
quarter, you would have sold out at the bottom.
Suppose you were to possess perfect knowledge that next quarter’s
GDP will be the strongest rising quarter for a span of 15
years, guaranteed. Would you buy stocks?
Had you anticipated precisely this event for 4Q 1987, you
would have owned stocks for the biggest stock market crash
since 1929. GDP was positive every quarter for 20 straight
quarters before the crash and for 10 quarters thereafter.
But the market crashed anyway. Three years after the start
of 4Q 1987, stock prices were still below their level of
that time despite 30 uninterrupted quarters of rising GDP.
Figure 10 shows these two events.
It seems that there is something wrong with the idea that
investors rationally value stocks according to growth or
contraction in GDP. …
Claim #6: “Wars are bullish/bearish for stock prices.” … (continued)
Keep
reading the 50-page Independent Investor eBook now,
free — all
you need is a free Club EWI password.
This
article was syndicated by Elliott Wave International and
was originally published under the headline Stocks Rally On the News of Bin Laden’s Death, You Say? It’s Not That Simple.
EWI is the world’s largest market forecasting firm. Its staff
of full-time analysts led by Chartered Market Technician
Robert Prechter provides 24-hour-a-day market analysis to
institutional and private investors around the world.
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