Fisher Investments Editorial Staff
Market Risks

Natural (In)effects

By, 03/02/2010

Story Highlights:

  • There's been a spate of natural disasters lately—major earthquakes in Haiti, Chile, and Japan—as well as ongoing terrorist attacks in the Middle East and globally.
  • Though surprise extraneous events have the potential to disrupt markets, stocks have historically proven resilient against such occurrences.
  • A major manmade or natural event always has the potential to impact markets, but it must be sufficiently huge in scope to do deep and lasting damage—and there's no way to foresee this.
  • Investors choosing to sit on the sidelines in fear of these ever-present, unforeseeable events might find it difficult to meet their long-term objectives.

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Nature has been unkind this year, bringing major earthquakes to Haiti, Japan, and Chile. Human destruction has likewise been tragic, with ongoing terrorist attacks in the Middle East and around the globe. Though it may seem cruel to analyze how these events affect investment returns, we believe it's important for investors to take into account all global events when making portfolio decisions—including the potential for surprise extraneous events to disrupt markets.  

Unfortunately, the human toll stemming from major natural disasters and large-scale terrorist attacks is often high. In the face of such tragedy, it's no wonder folks presume markets must be depressed following these events. After all, businesses, local economies, and lives are disrupted—sometimes severely for a lengthy period—and substantial resources must be diverted to help ameliorate the aftermath.  

Economically, these disasters can be devastating locally but are almost never big enough to sink national or global economies and, thus, aren't big enough to derail global stocks. Historical economic and stock market data following tragic events show resilience to natural disasters and terrorist attacks. Here's a look at market reactions to a few highly destructive, surprise historical events, including the recent 8.8 magnitude earthquake in Chile:* 

  • 9/11 Attacks (9/11/2001): The S&P 500 fell -4.9% when markets reopened on September 17th and -11.6% over the entire next week. Despite the initial sharp pullbacks, markets were back to September 10th levels by October 11th.
  • Madrid Train Bombing (3/11/2004): Spanish stocks fell several percentage points in the days immediately following the attack, but gained over +26% for the year.
  • Indian Ocean Earthquake/Tsunami (12/26/2004): Indonesian stocks didn't flinch, gaining +12% in the two months following the tsunami and over +17% in the year following.
  • London Train Bombing (7/7/2005): By the end of the next trading day, the FTSE 100 was higher than prior to the attack and gained over +16% in the year following.
  • Hurricane Katrina (8/29/2005): The S&P 500 fell -0.8% the Monday after Katrina but was above pre-Katrina levels within days and gained over +10% through yearend. US GDP also grew by 1.8% for the fourth quarter that year.
  • Haiti Earthquake (1/12/2010): Global stocks are down about 5% since the quake, but the decline has less to do with Haiti than concerns over PIIGS.
  • Japan Earthquake (2/26/2010): The Topix is up slightly since the 7.0 magnitude quake.
  • Chile Earthquake (2/28/2010): Chilean stocks finished the day down 1.2%, near session highs, falling nearly 3% midday. 

Major manmade or natural events always have the potential to impact markets, but they must be sufficiently huge in scope to do deep and lasting damage—and markets have shaken off a fair number of catastrophes. Today's interconnected world helps ensure no one area endures the burden of these events alone, helping to dampen the economic blow—perhaps helping to explain why their impacts on markets have historically been relatively minimal and short-lived. Conceivably, an event mammoth enough to have a large market and economic impact could occur, but such an event would have to be much bigger than anything we've seen since the outbreak of World War II. And it would be impossible to foresee. 

Jittery investors tempted to turn defensive when natural disasters or terrorist attacks strike or those choosing to avoid investing altogether for fear of such events could find it difficult to meet their long-term objectives. These risks are ever present, and there's no way to predict when they will happen or what market impact they might have. Avoiding investing until the risk of natural or manmade disasters subsides would mean never investing, and the market impact when they do occur is usually less than most people fear. Sometimes in investing, we have to fight against our natural instincts to avoid inflicting unnatural losses. 

*Sources: Global Financial Data for all returns except for Chile's IPSA. Chile IPSA returns from Bloomberg.

 

*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.

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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.

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