By Craig Erwin, Ph.D.
On Wednesday the Federal Reserve (the Fed), the U.S. central bank, decided to raise interest rates; it also announced that it plans to raise them six more times by year end. On the same day, many stock prices rose sharply, lifting the Nasdaq stock exchange 3.8% and the S&P 500 2.2%. Did stocks rise because of the Fed’s announcement? If so, how much of the stock markets’ rise was due to the Fed? How can you be sure that what happens to stocks is even related to what the Fed says and does?
Journalists and newscasters frequently pretend to know exactly why stocks rise or fall, frequently narrowing the reasons down to one or two. They can make the stock market appear easy to make sense of, where all stocks rise and fall for the same reason.
But the world is unpredictable. It is messy and full of contradictions. There are over 100,000 companies that have their stock traded on markets around the world. And there are at least tens of millions of people and institutions trading stock for any number of reasons. That makes it awfully hard to believe that there are just one or two reasons for stock market fluctuations on any given day. There could be millions of reasons.
The next time you hear someone say that the stock market rose or fell for one reason or another, be skeptical. Ask if it’s likely that some individual or group accurately measured what caused the stock of over 100,000 companies to rise or fall. I’m doubtful. It’s more likely that a journalist asked a Wall Street trader why he or she thought the market rose or fell. If you think it’s much more scientific than that, I might just have a bridge to sell you.
Do you regularly follow financial and economic news? If so, have you questioned what you’re told? Are there financial and economic news sources that you trust more than the others?
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