For decades, the \u2018efficient market\u2019 theory has been considered the\nprimary foundation of the investment world. This theory assumes that\nstock prices always accurately reflect all available information and a\ncompany\u2019s fundamental condition. However, current market conditions\nappear to suggest the opposite.<\/p>\n
Phenomena such as meme stocks, like GameStop, and the surge in\ntechnology stocks like NVIDIA demonstrate that stock prices are now more\nheavily driven by investor fund flows than by fundamental factors. Price\nrallies can continue even when valuations have become extremely\nexpensive. If stock prices truly reflected all available information,\nthe market should be one of the best forecasting tools ever created.\nYet, reality is not always so.<\/p>\n
GameStop, the video game retailer that became a symbol of retail\ninvestor frenzy in 2020, remains valued at more than 20 times its\npre-euphoria levels. In the same period, its performance has roughly\nmatched Nvidia, one of the biggest winners of the AI boom. The\nnarratives are almost opposites: Nvidia is supported by real business\ngrowth, whereas GameStop is largely supported by investor enthusiasm.\nThis contrast raises the question: do stock prices truly reflect\nfundamental value, or are there other forces at play?<\/p>\n
For decades, the most influential answer came from the Efficient\nMarket Hypothesis (EMH), popularised by Nobel laureate economist Eugene\nFama. The essence is simple: because millions of investors constantly\nseek information and react to new news, asset prices are believed to\nimmediately incorporate all available information. In such a condition,\nstock prices become the best estimate of a company\u2019s value and future\nprospects. For many economists, the market is not just a place for\ntransactions; it is an information-processing engine.<\/p>\n
However, the market often moves far more wildly than theory explains.\nGameStop is a difficult example to ignore; it is hard to explain why a\ncompany with a shrinking core business maintains a valuation far above\nits pre-meme-stock levels. Robert Shiller raised similar issues decades\nago. In research regarding bond markets in 1979 and stock markets in\n1981, the economist who later won the Nobel in 2013 found that asset\nprices moved far more volatilely than the underlying fundamental\nchanges.<\/p>\n
This is where newer theories are gaining attention. Xavier Gabaix of\nHarvard University and Ralph Koijen of the University of Chicago\ndeveloped what they call the \u2018Inelastic Markets Hypothesis\u2019. Their idea\nis simple: stock prices are influenced not only by earnings expectations\nbut also by the flow of capital entering and exiting the market. Their\nfindings are striking: every US$1 of new funds entering the stock market\nis estimated to increase the overall market value by US$3 to US$8. In\nother words, prices do not always rise because business prospects\nimprove; sometimes, prices rise because more money is chasing the same\nnumber of shares.<\/p>\n
To explain this mechanism, Gabaix and Koijen divide the market into\nthree groups of investors: momentum hunters, who tend to buy when prices\nrise; fixed-allocators, such as 60\/40 equity-bond portfolios; and value\ninvestors, who usually enter only when prices are cheap. When new funds\nenter the market, few parties are immediately willing to sell. Momentum\nhunters want to buy more, fixed-allocators sell only after prices rise,\nand value investors often choose to wait. Consequently, new capital\nflows can drive prices up even without significant fundamental\nchanges.<\/p>\n
Furthermore, many investors buy because they must. Pension funds\nreceive contributions every month, individual investors buy stocks\nwhenever they receive a salary, and many institutions must invest to\nmeet specific target returns or mandates. They are not necessarily\nbuying because they have discovered information that company profits\nwill surge next year; they are buying because they are required to buy.\nThese transactions nonetheless affect prices.<\/p>\n
Stock indices are often treated as tools to read the economic future.\nWhen the market rises, the economy is deemed to be improving. However,\nif prices are also influenced by liquidity, capital flows, and market\nstructure, that relationship is not so simple. The market still contains\ninformation, but that information is blended with many other factors\nthat are not always related to fundamentals. The stock market remains\nuseful, but like many forecasters, it does not always see the future as\nclearly as is often imagined.<\/p>", "url": "https:\/\/jawawa.id\/newsitem\/want-to-know-the-future-do-not-trust-stock-prices-1780828230", "image": "" }, "sponsor": "Okusi Associates", "sponsor_url": "https:\/\/okusiassociates.com" }