Thursday, March 17, 2011

Chart Of The Day: The Historical Short Term Impact of Natural Disasters On Stock Markets

I earlier wrote about the impact of natural disasters on stock markets as mostly short-term in duration.

Eventually, markets write them off or discounts or reappraises ‘uncertainty’ into ‘risk’.

The Economist has a good depiction of such discounting process on the stock markets as seen in several major disasters via the graph below...

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From the Economist

UNCERTAINTY over the extent of the damage caused by the earthquake in north-east Japan on March 11th, and the associated radiation leak at the Fukushima Daichi power station 140 miles (225km) north of Toyko, has made trading on Japan’s stockmarket an eventful affair. The Nikkei 225 index fell 17.5% in the three trading days following the catastrophe, wiping some ¥37 trillion ($458 billion) off equities. This compares unfavourably with market reactions to other disasters. Once the New York Stock Exchange had reopened six days after the September 11th terrorist attacks, the S&P 500 fell by 11.6% over five trading days, but after a further 14 days it had recovered to its pre-disaster level. After Japan’s last severe earthquake in the city of Kobe in 1995 the Nikkei 225 fell by 7.6% over the next four trading days, but it did not recover to its pre-earthquake level for another 11 months. The Nikkei 225 regained some lost ground today, closing up 5.7%. The Japanese will be hoping for the same bounce back in their own fortunes.

As I earlier said, while the earthquake-tsunami event had been predictable or was expected to happen (except for the exactitudes), the uncertainty over the scale of damage from the unfolding nuclear accident has been the black swan event.

Since this has yet to be resolved, the escalating risks of radiation leakages continue to linger or haunt the markets, hence the prolonged selling pressure.

The question remains if there are other hidden but more powerful forces at work which operates on the cover of the unfortunate Japan’s nuclear episode.

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