The worst Pacific Region earthquake since 1964 hit Chile recently, yet the market rose the next day and kept rising all of last week. The market almost invariably responds to unexpected shocks by rising. How can we possibly explain that?
I’ll give you some theories in a minute, but first the evidence: Let’s take a look at the Four Horsemen of the Apocalypse and see how each of these nightmares failed to cause a market crash.
Horseman #1: Pestilence
Does swine flu concern you? Or bird flu, or SARS? Each was a major scare in the last decade and each (thankfully) failed to live up to its advance billing. But what if a global epidemic struck, killing 100 million people? Such an event happened 90 years ago. According to “The Great Influenza” by John Barry, 50 to 100 million people died from one flu bug, 1918 to 1920. In today’s more densely-populated planet, that is the equivalent of 250 million or more. What did the stock market do? From December 19, 1917 (when the epidemic began) to November 3, 1919 (when the epidemic began winding down), the Dow gained 81.4%.
Horseman #2: War
Do wars concern you? They should. But does the market care? After Hitler launched World War II by invading Poland on September 1, 1939, the market unexpectedly soared, rising 16.85% in September, 1939. After Pearl Harbor, the market dropped for a while, but 1942 through 1945 were up 20.3%, 25.9%, 19.8% and 36.4%, respectively, for a cumulative 147.5% gain in the years the U.S. was at war. The same thing happened in Korea, with the market rising 31.7% in 1950, the year the war began, then 24% in 1951 and 18% in 1952. Gulf War I fueled a 20% market rise in early 1991, as did Gulf War II in March-August, 2003.
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Horseman #3: Famine
Let’s cast a wider net to cover all natural disasters that destroy crops and homes and leave people hungry without shelter. These events are terrible, and we should care for the hurting with our dollars and our thoughts. But does the market care? The quakes this year in Haiti and Chile caused no market stir. Neither did the Asian tsunami on the day after Christmas, 2004, nor the tragic flooding of New Orleans in late summer 2005. The virtual destruction of a major American city (like New Orleans in 2005 and San Francisco in 1906) was not even noticed by the market. The same was true after the severe (9.3) 1964 Alaskan quake.
Horseman #4: Death
Beyond wars, epidemics and natural disasters, some especially traumatic events have transfixed our world – from the singular trauma of JFK’s assassination to the Challenger explosion to the terrorist attacks of 9/11. What happened then? Ironically, the market rose 5% the week after Kennedy was killed; it rose after the Challenger exploded, and it began recovering just 19 days after 9-11-01.
What’s behind this phenomenon?
There are a number of theories as to why horrific events fail to grab investors’ attention. The first, which I don’t put any stock in, is that “broken windows” create jobs. The theory is that as events like war or disaster destroy things, the companies that build and repair those items find new opportunities. Several economists debunked this myth, since it’s basically a shell game where gain or loss is dependent on the merchant. It’s not shared success for all.
I lean towards the theory that the market loves to focus on financials, and that as long as banks are fine then all of Wall Street will be fine … but it’s much more complicated than that, of course. It’s always hard to isolate the psychological factors of investing and how they work on normal days, let alone during a crisis.
For whatever reason you choose, there is some cold comfort in knowing that no matter how tragic the world’s events may seem, the market is one thing we don’t need to worry about when sudden tragedy strikes. And, if you’re in a trading mood, it might be a good strategy to buy after the market’s first knee-jerk drop.
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