Search

Search

• 
• 
• 
• 

 

Gary Alexander

If “the Worst” Happens…the Market Will Recover (Fast!)

Posted by: Gary Alexander on 3/4/2010 1:25:00 PM

It happened again - the worst Pacific Region earthquake since 1964 hit Chile - yet the market rose the next day, then kept rising. 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 if any of these nightmares is capable of causing market crashes.

The Four Horsemen - Unhorsed by the Markets

In the book of Revelations (Apocalypse in Greek), the four horses of Chapter 6 are generally interpreted as being epidemics (pestilence), war, famine (from natural disasters) and sudden death (call it terrorism today). These events happen from time to time, not all at once, so what has been the market reaction to each one?

Epidemics: 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%.

Wars: 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.

Earthquakes, Tsumanis and Floods: They're 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.

Sudden Tragedies: Beyond wars, epidemics and natural disasters, some especially traumatic events have transfixed our world - such as the Cuban Missile Crisis, when all mankind's survival was in the balance, or the singular trauma of JFK's assassination, the Challenger explosion, or 9-11-2001. What happened then? Ironically, the market rose 5% the week after Kennedy was killed; it was flat during the worst days of the Cuban missile crisis; it rose after the Challenger exploded, and it began recovering just 19 days after 9-11-01.

Terrorism didn't begin in 2001. Sneak attacks had been going on for at least three decades before 9-11, since the Munich Olympics and before. But the stock market recovered within two days after nearly every other terrorist attack, including the Pan Am 103 (Lockerbie) bombing of December 21, 1988, the first World Trade Center bombing of February 26, 1993, the Oklahoma City bombing of April 19, 1995, the attack on the USS Cole on October 12, 2000, the Bali bombings of October 12, 2002, the Madrid bombing of March 11, 2004, and the London bombing of July 7, 2005. In the latter case, the market didn't drop at all. (We're learning.)

Finally, let's look at two nearly-forgotten violent attacks on the U.S. Capitol during this week in history:

On March 1, 1954, four members of an extremist Puerto Rican nationalist group fired over 30 shots onto the floor of the House of Representatives from the visitors' gallery, injuring five U.S. members of Congress. After that attack, the market rose by 3.46% in March and 27% in the next six months.

On March 1, 1971, a bomb exploded in a restroom in the Senate wing of the Capitol, causing over $300,000 in damages, but no injuries. The Weather Underground, a leftist radical group opposing the Vietnam War, claimed responsibility. (The market then rose 4% in March and another 4% in April.)

I could cite more history for another 10 pages, but I won't belabor the obvious: The market usually rises (or recovers fairly fast) after the worst external events the world can throw at us. Why would that be true?

Some Possible Explanations - Which One Do You Buy?

"Broken Windows Create Jobs" (or its cousin: "War is Good for the Economy"): This is the most popular theory. In the case of natural disasters, new work is created to repair the damage. In the case of wars, unemployed young men go to war, while older workers are hired to create war material.

"Buy when Blood is in the Streets": This theory basically says that the crisis is the bottom point of the market, and a good buying opportunity. In a variation of that theory, the market discounts the worst events happening, so when crisis strikes, the market is relieved of that weight and can rise again.

"The market only cares about financial news": No natural disaster or war is bigger, to the market, than the financial situation of the world. Nearly all market crashes have been related to financial causes, not other external events. By this theory, all the unrest in the world is merely background noise. A good example is 1962: The market fell due to U.S. Steel's crisis in the spring, not over the missiles in the fall.

"The Market is a Great Humbling Machine": Ken Fisher calls the market "The Great Humiliator" (TGH). The market will do whatever it takes to fool the most people, the most number of times, for the most cumulative dollar losses. In the case of natural disasters, TGH is merely teasing us into selling.

It's time to vote:

For the record, I don't buy the "broken windows" argument (#1). Several economists have debunked that old myth. I lean toward #3, but am probably most aligned with #5: A combination of the above. 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.

Comments

Important Disclosures Regarding Navellier Blogs (updated April 2008)

Although information in this presentation has been obtained from and is based upon sources that Navellier believes to be reliable, Navellier does not guarantee its accuracy and it may be incomplete or condensed. All opinions and estimates constitute Navellier's judgment as of the date the presentation was created and are subject to change without notice. This presentation is for informational purposes only and is not intended as an offer or solicitation for the purchase or sale of a security. Any decision to purchase securities mentioned in this research must take into account existing public information on such security or any registered prospectus.

Investment in securities involves significant risk and has the potential for partial or complete loss of funds invested. To receive a complete list and descriptions of Navellier’s composites and/or a presentation that adheres to the GIPS standards, please contact Tim Hope at (800) 365-8471 or . It should not be assumed that any securities recommendations made by Navellier & Associates, Inc., in the future will be profitable or equal the performance of securities made in this report. For a list of recommendations made by Navellier & Associates, Inc., for the preceding twelve months, please contact Tim Hope at (775) 785-9416.