If everyone says that shocks from outside the financial system — so-called exogenous shocks — can affect it for better or worse, they must be right.<\/p>\n
It just sounds so darned logical, right? Economists believe this trope to be true, mainly because they believe that investors are rational thinkers who re-evaluate their positions after every new bit of relevant information turns up.<\/p>\n
Beginning to sound slightly impossible? Well, yes.<\/p>\n
It turns out that logic is exactly what’s missing from this it-feels-so-right idea of rational reaction to exogenous shocks. Read an excerpt from Robert Prechter’s February 2010 Elliott Wave Theorist <\/em>to see how Prechter deals with this widely held belief.<\/p>\n Find out what really moves markets — download the free 118-page Independent Investor eBook.<\/a><\/strong><\/span> The Independent Investor eBook shows you exactly what moves markets and what doesn’t. You might be surprised to discover it’s not the Fed or “surprise” news events. Learn more, and download your free ebook here.<\/a><\/strong><\/span><\/p>\n * * * * *<\/p>\n Excerpted from Prechter’s February 2010 Elliott Wave Theorist<\/em><\/a><\/span><\/em>,<\/span> published Feb. 19, 2010<\/p>\n The Efficient Market Hypothesis (EMH) argues that as new information enters the marketplace, investors revalue stocks accordingly. \u2026 In such a world, the market would fluctuate narrowly around equilibrium as minor bits of news about individual companies mostly canceled each other out. Then important events, which would affect the valuation of the market as a whole, would serve as \u201cshocks\u201d causing investors to adjust prices to a new level, reflecting that new information. One would see these reactions in real time, and investigators of market history would face no difficulties in identifying precisely what new information caused the change in prices. \u2026<\/p>\n This is a simple idea and simple to test. But almost no one ever bothers to test it. According to the mindset of conventional economists, no one needs to test it; it just feels right; it must be right. It\u2019s the only model anyone can think of. But socionomists [those who use the Wave Principle to make social predictions] have tested this idea multiple ways. And the result is not pretty for the theories that rely upon it.<\/p>\n The tests that we will examine are not rigorous or statistical. Our time and resources are limited. But in refuting a theory, extreme rigor is unnecessary. If someone says, \u201cAll leaves are green,\u201d all one need do is show him a red one to refute the claim. I hope when we are done with our brief survey, you will see that the ubiquitous claim we challenge is more akin to economists saying \u201cAll leaves are made of iron.\u201d We will be unable to find a single example from nature that fits.<\/p>\n * * *<\/p><\/blockquote>\n In his February 2010 Elliott Wave Theorist<\/em><\/a><\/span>, <\/em>Prechter then goes on to show charts that examine each of these claims that encompass both economic and political events:<\/p>\n Claim #1: \u201cInterest rates drive stock prices.\u201d To protect your personal finances, it’s important to think independently from the crowd, particularly when the crowd buys into what economists say.<\/p>\n Find out what really moves markets — download the free 118-page Independent Investor eBook.<\/a><\/strong><\/span> The Independent Investor eBook shows you exactly what moves markets and what doesn’t. You might be surprised to discover it’s not the Fed or “surprise” news events. Learn more, and download your free ebook here.<\/a><\/span><\/strong><\/p>\n By Susan Walker – If everyone says that shocks from outside the financial system — so-called exogenous shocks — can affect it for better or worse, they must be right…<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[],"tags":[],"class_list":["post-7263","post","type-post","status-publish","format-standard","hentry"],"_links":{"self":[{"href":"https:\/\/www.investmacro.com\/fx\/wp-json\/wp\/v2\/posts\/7263","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.investmacro.com\/fx\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.investmacro.com\/fx\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.investmacro.com\/fx\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/www.investmacro.com\/fx\/wp-json\/wp\/v2\/comments?post=7263"}],"version-history":[{"count":0,"href":"https:\/\/www.investmacro.com\/fx\/wp-json\/wp\/v2\/posts\/7263\/revisions"}],"wp:attachment":[{"href":"https:\/\/www.investmacro.com\/fx\/wp-json\/wp\/v2\/media?parent=7263"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.investmacro.com\/fx\/wp-json\/wp\/v2\/categories?post=7263"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.investmacro.com\/fx\/wp-json\/wp\/v2\/tags?post=7263"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}
\nClaim #2: \u201cRising oil prices are bearish for stocks.\u201d
\nClaim #3: \u201cAn expanding trade deficit is bad for a nation\u2019s economy and therefore bearish for stock prices.\u201d
\nClaim #4: \u201cEarnings drive stock prices.\u201d
\nClaim #5: \u201cGDP drives stock prices.\u201d
\nClaim #6: \u201cWars are bullish\/bearish for stock prices.\u201d
\nClaim #7: \u201cPeace is bullish for stocks.\u201d
\nClaim #8: \u201cTerrorist attacks would cause the stock market to drop.\u201d<\/p><\/blockquote>\n
Susan C. Walker <\/strong>writes for Elliott Wave International<\/em>, a market forecasting and technical analysis company.<\/p>\n","protected":false},"excerpt":{"rendered":"