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.