WHAT IS A STOCK MARKET?
Stock Market is a Collective but Unpredictable Expectation
The second important fact that investors must understand is that the stock market is a collective expectation. As long as majority of the participants have the same view on certain things, that view will cause a reaction to the market, regardless of whether or not you agree with the view. The constant changes in views and expectations are what causes the swings in stock markets.
There are a few recent examples to illustrate this. Take Brexit (i.e., Britain exiting the European Union) for instance. Before the Brexit vote, the consensus view in the market was that if Brexit were to materialise, the outcome will create a domino effect within the European Union and send the global market on a downward spiral. Thus, prior to the vote, equity markets, especially on the European side, started drifting downwards even before the actual voting.
However, the Brexit scenario did materialise – the British voted to leave the European Union – but the domino effect and the downward spiral in global equities did not. In fact, the opposite happened. Somehow, after the vote, investors across the globe managed to convince themselves that Brexit will have no impact on the European block and sent the equity markets higher, including the UK and Europe markets (see Figures 1 and 2).
The second example was during the US Presidential Election in November 2016. As presidential candidate Donald Trump was leading in vote counts, the S&P500 futures actually drifted lower, and at one point hit an intraday low exceeding 4%. However, when Trump finally won the election, the market rebounded with optimism. Don’t believe me? See Figure 3.
This just shows the reality: The stock market is beyond anyone’s guess.