By Matt Lampert | Excerpted from the January 2019 Socionomist
The November 1992 issue of The Elliott Wave Theorist pointed to trade disputes between the U.S., France, Japan and Australia. It noted that negative mood leads “regions of allegiance to contract” and that trade wars are “one of the typical results.” Conquer the Crash said that protectionism “is correctly recognized among economists of all stripes as destructive, yet there is always a call for it when people’s mental state changes to a defensive psychology. The inevitable dampening effect on trade is inescapable.” Time and time again, journalists miss the true cause of trade disputes: social mood. The January 2019 issue of The Socionomist examines these disputes, plus the mistaken belief among journalists that trade wars control the stock market. Following are excerpts from that issue:
This month, we deconstruct some of the most prominent explanations du jour for recent news and stock market action.
Myth: The Trade War is Rocking the Markets
How many articles have you seen over the past ten months that attributed moves in the stock market to developments in the U.S.-China trade war? Dozens, maybe hundreds, right? When the market goes up, journalists claim it was due to an easing of trade war worries. And when the market goes down, journalists claim it was due to renewed trade war tensions.
So, let’s imagine that the U.S. and China were to declare an end to the trade war. Would you buy stocks? Anyone unlucky enough to do so on Monday, December 3, on the news that the two countries’ leaders agreed to a trade-war truce over the preceding weekend, ended up buying the day of a rally high in the Dow Jones Industrial Average, after which stocks had their worst week since March.
For most of 2018, nearly every time the market dipped, journalists, economists, financial analysts and scores of talking heads on TV told us that the trade war was the cause. Yet once the two sides called a truce, the stock market promptly had one of its worst weeks of the entire period.
The key as a speculator is to understand that positive trade news won’t make the stock market go up, and negative trade news won’t make the stock market go down. Mood will do what it does, and pieces of news – be they related to trade, the Fed, or something else—will get the credit or the blame.
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