Question

All of a sudden it is announced that a vaccine is available for COVID during a pandemic and the S&P 500 gains 10% immediately. The next day it is suddenly announced that the vaccine only works for 2 days immunity and the S&P 500 falls by 9.8%. Your friend shakes their head and says “wow, the stock market is really irrational why do you bother studying money and banking?” Is your friend correct? Explain.

Answer 1

No, the friend is not correct. The stock market is not irrational, they are very efficient and reflect all the information that is available. The frequent fluctuations are caused by irrational expectations of investors who buy or sell immediately based on a news event. However, in the long run stock prices reflect demand and supply situations.

Also, studying banking and money is important as a developed financial sector is key to modern economy functioning.