How Rational Is The Stock Market?



Every time President Donald Trump tweets about businesses or the economy or trade relations, the stock market reacts. When President Trump reverses his position later in the same day with another tweet, the stock market reacts.

The stock market reacts when Chinese officials speak, when the Federal Reserve chairman speaks, when Mark Zuckerberg speaks, and when Mitch McConnell speaks. The stock market reacts all the time.

Sometimes, the stock market reacts in unexpected ways. When the Federal Reserve dropped the benchmark interest rate by a quarter-point in July, the Dow Jones and other indices actually fell, because President Trump wanted a bigger cut.

There does seem to be a push-and-pull relationship between public comments and stock market prices, but does that effect make sense?

In its monthly survey of wealthy investors, Spectrem asked whether those investors think the stock market is “rational”. The investors were asked to place their response along a 100-point scale: the higher the rating, the higher the rationality of the market.     

In July of 2019, the average response was 42.29, leaning toward irrationality. For an average score, 42.29 is relatively far removed from the median.

Is this how your clients feel about the stock market? Does this attitude impact the way they invest? Do they forego investing in individual stocks because the process seems to make little sense?

It is interesting to note that the average response in July of 2019 was lower than the response received by Spectrem the last time it asked the question. In the early months of 2018, the average response was 43.16.

The responses get even more interesting when investors are segmented by age, financial knowledge and occupation.

Investors were asked to rate themselves on their knowledge of finance and investing, and those who rate themselves as “very knowledgeable” rated the rationale of the stock market at 48.65, which is still below the midpoint. Those who rated themselves as “not very knowledgeable” or “not at all knowledgeable” rated the rational nature of the stock market at 38.83, which is very low, and must play a role in the way they invest.

Do your clients need to be educated on how stock market prices get set, and why those prices are representative of the value of the company stock?

Based on occupation, business owners themselves had the lowest level of respect for the rational nature of the stock market, rating it at 35.17. Interestingly, investors from the field of Information Technology also rated it low, at 37.39.

So, are there any true believers among investors?

When investors are segmented by age, Millennials gave the rationale of the stock market the highest rating at 49.18. The rating dropped to 40.64 among Baby Boomers.

But even that Millennial rating is below the midpoint, which means the stock market has a perception problem.



©2019 Spectrem Group

Keywords: stock market, rational, dow jones, investors, advisors, Spectrem, NASDAQ