Delayed Onset: Some Historical Comparisons

I wanted to address some of the historical comparos as to why the market has been moving higher, despite what is obviosuly (at least to me) news that has a negative economic impact.

From Friday’s column, a bonus ubiq-cerpt™:

Many commentators have noted the market’s impressive resilience in the face of adversity. This is not historically unprecedented. When the great San Francisco earthquake hit in April 18, 1906, it took the markets a few weeks to register the costs and economic impact. By May, the markets had fallen 10%. But the full impact was not well understood until the following year, leading to the Panic of 1907, and the Dow took a nearly 50% hit during that period. History buffs will recall the Panic and its aftermath were the impetus for the creation of the Federal Reserve System. (This paper details the economic impact of 1906 Earthquake.)

For those who note that communications in 1906 were somewhat slower than they are in modern times, consider a more recent example: The 1973 OPEC oil embargo. For several weeks, markets all but ignored the issue, as U.S. stock markets traded sideways. Investors eventually recognized the enormity of what the embargo meant to the U.S., and stocks sold off.

The key to each of these events was not the speed of communications. Rather, it was the gradual comprehension by investors of the enormity of what occurred. Investors are emotional creatures who often react to visceral evidence, rather than relying on contemplative analysis. That may be why an act of nature like Katrina is perceived so differently than a man-made disaster, such as the Sept. 11 terrorist attacks.

The immediate reaction to what amounted to a declaration of war was a fierce selloff once the markets re-opened post Sept. 11. Katrina, while an extraordinarily strong hurricane, was merely part of the ordinary course of weather events. Comprehending the differing economic impacts — and shifting one’s viewpoint accordingly — is hardly an easy task.

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  1. Steve Goulet commented on Sep 12

    I certainly agree with your analysis, and I read your column closely because I have been very surprised with the markets reaction to Katrina thus far. I am especially intrigued by the markets reluctance to acknowledge the long term effect of higher energy prices on the US and global economies. A muted and cautious response would be expected, but to see the market rally over the last two weeks has been amazing.

    Your outline of the 1973 OPEC embargo is probably the best analogy I have seen to our current state of denial. Of course the next question would be “Which sectors suffered the greatest fall as the fog of denial lifted?” For me it is not a question of short or long, but a question of where to be short.

  2. Blackwood commented on Sep 12

    What if the impact really is minimal?

    Lousiana’s death toll has plunged from the 10,000 to now today 191 actual confirmed dead.

    What if the Hurricane is just a two week exercise in hype and mirrors manufactored by a media desperate for high television ratings?

    And since when was New Orleans a large economic powerhouse the equivalent to San Francisco? Look at average household income. Compare the % of the nation’s economy provided to that of San Francisco in 1906.

    Will this even still cause the Fed to pause in raiding interest rates at their next meeting? The dumb money is saying yes. The smart money doesn’t seem so sure.

  3. Dean N. commented on Sep 12

    Another hypothesis for why the market reaction is different and seems to be immune to even short-term panic:

    Current trading has fewer individual investors (who are busy chasing the real estate bubble) and more program and institutional trading. Critical mass of individual investors in the market may have been the catalyst for more immediate emotional reaction during past events.

    Corollary: If the housing bubble pops then you may see a full-blown emotional reaction/panic

  4. Mr. Econotarian commented on Sep 12

    Perhaps the 1973 oil embargo did not become a major issue until US price controls were able to combine with higher oil prices to lead to actual US fuel shortages.

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