Stock Market: Sentiment Or Fundamentals?

(Drivebycuriosity) - There is an ongoing discussion about the stock market. Some say stock prices are influenced by psychology and by sentiment, others claim that they reflect the economic fundamentals. Last week we got some new insights.

Thursday October 19th was the 30th anniversary of the stock market crash from 1987, the so-called "Black Monday". On this day the global stock markets suddenly dropped sharply and the Dow Jones tanked 22%. Last week the headlines where littered with Black Monday reminders, especially on Thursday morning. Many commentators warned it could happen again.

Apparently the anniversary - the media obsession with a historical crash -  influenced the sentiment last Thursday, at least temporarily. In the morning hours the US Stock market responded and opened sharply lower -  a tribute to the pessimistic sentiment. But at the end of the day the stock market (SP500) recovered and closed in green (as you can see above). On Friday the rally continued and Dow Jones & S&P 500 closed on  new all time highs. For some hours the stock market was ruled by the sentiment and psychology but at the end of the day the fundamentals won over.

 Skeptics might call last week`s stock market performance complacent but crashes are rare. In the history of the Dow Jones (founded 1896) there were just 4 events with a daily loss of more than 10% (wikipedia). 4 massive crashes in 119 years - that gives them a very low probability! And 3 of them happened before Word War II.

The recent stock market highs are a response to the positive economic fundamentals: Growing global economy, rising company earnings and an US tax reform in the making. Fundamentals rule!