It is common for economists to offer a forecast for the stock market yet add a caveat to the effect that “If a war shock or terrorist attack occurs, then I would have to modify my outlook.” As such, it would seem logical to assume that…they must have access to a study showing that such events affect the stock market, right?
By Vadim Pokhlebkin/Robert Prechter (elliottwave.com) originally entitled* Myth #6: “Wars are bullish/bearish for stocks.”
The answer to the opening question is NO, for the same reason that they do not check relationships between interest rates, oil prices or the trade balance and the stock market. The causality just seems too sensible to doubt.
Observe in the form of this claim that you have a choice for the outcome of the event. Economists have in fact argued both sides of this one.
- Some have held that war stimulates the economy, because the government spends money furiously and induces companies to gear up for production of war materials. Makes sense.
- Others have argued that war hurts the economy because it diverts resources from productive enterprise, not to mention that is usually ends up destroying cities, factories and capital goods. Hmm; that makes sense, too.
I will not take sides here. We can negate both cases just by looking at a few charts.
The chart below shows a time of war when stock values rose, then fell.
This chart shows a time of war when stock values fell, then rose.
This chart shows a time when stock values rose throughout.
This chart shows a time when stock values fell throughout.
Who wins the war seems to mean little, either. A group of Allies won World War I as stock values reached 14-year lows; and nearly the same group of Allies won World War II as stock values neared 14-year highs.
Given such conflicting relationships, why and how, exactly, does an economist expect war to affect his economic forecasts?
[The above article is presented by Lorimer Wilson, editor of www.munKNEE.com and www.FinancialArticleSummariesToday.com and the FREE Market Intelligence Report newsletter (sample here – register here) and may have been edited ([ ]), abridged (…) and/or reformatted (some sub-titles and bold/italics emphases) for the sake of clarity and brevity to ensure a fast and easy read. The author’s views and conclusions are unaltered and no personal comments have been included to maintain the integrity of the original article. This paragraph must be included in any article re-posting to avoid copyright infringement.]
* http://www.elliottwave.com/freeupdates/archives/2014/10/06/Don-t-Get-Ruined-by-These-10-Popular-Investment-Myths-%28Part-VI%29.aspx#axzz3IOE2gK92 (© 2014 Elliott Wave International)
If you liked this article then “Follow the munKNEE” & get each new post via
Most economists (primarily Keynesians and monetarists) believe that authorities can control the money supply and interest rates, and most neo-Austrians believe that the Fed is all-powerful when it comes to inflating – that whatever inflation rate it wants, it simply manufactures. Is that true or false? Read on for the answer. Read More »
This one seems like a no-brainer. The government or the central bank prints more bonds, notes and bills, and prices for things go up in response. Gold is real money, so it must fluctuate along with the inflation rate. It’s basic physics but it doesn’t happen that way. Let’s examine the history of inflation and the precious metals since the low of the Great Depression. Read More »
It seems logical that a scary, destructive terrorist attack, particularly one that implies more attacks to come, would be bearish for stock prices – but has that actually been the case? Read More »
It would seem logical to say that peace allows companies to focus on manufacturing goods, providing services, innovation and competition, all of which helps the overall economy but does peace, in fact, have anything to do with determining stock prices? Read More »
A sensible story of causation regarding oil prices and stock prices made by countless economists is that “rising oil prices increase the cost of energy and therefore reduce corporate profits and consumers’ spending power, thus putting drags on stock prices and the economy.” Stunningly, as far as I can determine, however, no evidence supports that claim, as the discussion below will show. Read More »
Q: Is it correct to assume throughout that an expanding trade deficit impacts the economy negatively? A: No, the relationship, if there is one, is that there has been a positive — not negative — correlation between the stock market and the trade deficit. Let me explain. Read More »
The belief that earnings drive stock prices powers the bulk of the research on Wall Street but this glaring exception to the idea of a causal relationship between corporate earnings and stock prices challenges that theory. Let me explain. Read More »
Macroeconomic news supposedly explains only about one fifth of the movement in stock prices but if there is no accommodating theory, then the presumed causality involved is tenuous at best. Let me explain. Read More »
Events and conditions do not make investors behave in any particular way that can be identified as shown in this analysis of the supposed relationship between interest rates and stock prices. So much for the popular claim that “Interest rates drive stock prices”! Read More »