Chapter 14 Expectations Theories—Always Changing, Always Relevant

Expectations drive markets. Immediately after economic data is released traders and media outlets are comparing them to “expectations.” Intuitively it feels odd that there could be an announcement of gross domestic product (GDP) being down –2% and the stock markets trade up because expectations had been for –2.8%. However, this is the power of expectations and why expectations are often as important as the data itself. As discussed earlier, expectations about inflation can theoretically be more important than what the inflation numbers are. This is because this expectation is what impacts the consumers’ decision to spend or to save. The same can be said about expectations for interest ...

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