Question

) On October 6, 2020, the US President abruptly tweeted that the White House is pulling out of ongoing negotiations on a new stimulus bill intended to address covid19 pandemic’s impact on the economy. All stock market indices immediately dropped by more than 1%. Was this movement consistent with market efficiency? Why, or why not?

Answer 1

Yes, indeed the stock market movement was consistent to market effeciency. According to effecient market hyposthesis, the share prices (stock market) reflect all information which is available to the market participants. When the news was there, that White House is thinking on bringing a new stimulus bill to address covid19 pandemic's impact on economy, the stock market rose capturing the hope of stimulus. And, when the US President tweeted of the opposite, the stock market immediately dropped by more than 1% to capture the news, that, the stimulus wouldnt be there.

Logically, any stimulus means, that the citizens and various industries who are currently operating in the economy will have more money to spend, which unless went into loss or zero because of very less demand of goods and services, or gone into taxes. So, by reducing the taxes or reducing the interest rates, or any such type of stimulus activities done by the government would create additional money or demand in the hands of the citizens and industries which would bring back the economy on track and people of the country shouldnt suffer because of pandemic.

So, when stock market rose capturing the news that stimulus will be announced, the market moved to effeciency, and again when the US President abruplty tweeted of pulling out of negotiations of stimulus, the stock market again moved towards the effeciency.