On the weekend I was reading a book by a well-known stock trader talking about how rumors and fake news drive the stock market prior to a presidential election. Interestingly, the book was written in 1923 and referred to past US election campaigns where fake news had caused the stock market to fall heavily only to rise strongly after an election. Does this sound familiar? What is scary is how people respond to the news, not the news itself. In the last presidential election Hillary Clinton referred to the term “fake news” in her speeches prior to the election but it was Donald Trump who took the term and ran with it after his election win. While Trump’s Presidency may have made it a headline, the dissemination of fake stories or opinions that drives stock markets is nothing new.
So what does that say for human behavior?
Before the last election many news outlets were predicting that the stock market would fall if Trump was elected. Yet shortly after the result was announced the market rallied hard and has continued since. Apparently, a Trump win is now a good thing.
There is uncertainty about the outcome for the current election with news suggesting that there is doubt about Bernie Sanders getting into the Whitehouse and that the market is likely to fall if he does get into power. Yes, we have heard it all before and we will hear it all again in the future.
The hard facts about the US stock market are that since the low of the GFC in March 2009 the Dow Jones Index has fallen more than 10 percent on six separate occasions prior to last week’s fall. The largest was in 2011 where it fell 19.20 percent and again into December 2018 where it fell 19.4 percent
In comparison, when looking at the S&P 500, it has fallen over 10 percent on seven separate occasions since March 2009 with the largest being 21.3 percent into October 2011 and 20.20 percent into December 2018. So there is nothing unusual about what the market is doing right now, it is just the speed of the fall that is a surprise.
While the corona virus is affecting the market, it is not occurring anywhere near the extent we perceive. The fear and panic caused by the fake news and the media is affecting the market far more and is the reason we are experiencing the current market volatility. If history repeats, and I think it will, all the fear will subside very soon and will see the US stock market rise once again.
By Dale Gillham, chief analyst Wealth Within
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