The stock market is obviously not for everybody but ultimately if you have money in the bank of any kind or an insurance policy or a pension plan, your money is being traded around the stock market whether you like it or not. But what happens when the stock market is closed like it has been for the Super Storm of the Century ‘Sandy’? In today’s increasingly interconnected economy, the economic fallout from a natural disaster is rarely relegated to the geographic area that it hits. In fact, even natural disasters that take place thousands of miles away can shake up your portfolio here at home. One of the biggest problems for areas affected by natural disasters is business disruption. With road, communication infrastructure, and building damage common after sizable disasters, it’s not uncommon for local businesses to be shut down for some time after the aftershocks settle. On a grand scale, that’s what happened after Hurricane Katrina ravaged the Gulf coast back in 2005 – as companies reeled from catastrophic losses, millions of workers in Louisiana, Texas and Mississippi were left jobless, compounding the already staggering poverty problem in the region. The last day before Katrina struck the Gulf Coast, the Dow Jones Industrial Average closed at 10,450. Eleven days later, it closed at 10,589, up 139 points, or 1.3%.What happened? Let’s ask history… Below you’ll find the daily charts of the Dow Jones Industrial Average following hurricanes Andrew (1992), Hugo (1989) and Camille (1969). All three storms had monstrous effects, both economically and emotionally. For the weather hounds out there, these were classified as category five, four and five hurricanes, respectively. For the non-weather hounds, category five is the highest rating given to a hurricane and has sustained winds of 156 miles per hour or higher.

The Stock Market Following Hurricane Hugo (1989)

The Stock Market Following Hurricane Hugo (1989)

The Stock Market Following Hurricane Camille (1969)

Following the Japan earthquake, investors were quick to “sell now and ask questions later.” As it turns out, this was wrong. Here’s why it would have made sense to hold on to stocks, at least over the short-term

Do disasters, natural or otherwise, send stock prices spiraling? According to the media, they do (just think of the headlines right after the earthquake). But what do the facts say. Here are the five most devastating disasters and how they affected the stock market.

1) Indian Ocean Earthquake – December 26, 2004
This undersea earthquake had its epicenter off the west coast of Sumatra. The earthquake and the resulting tsunamis killed over 230,000 people in 14 countries. There was no immediate effect on stocks. A low came 20 trading days later when the S&P had corrected 3.8%. It went on to rally as much as 35% thereafter.

2) Haiti Earthquake – January 12, 2010
The 7.0 earthquake and some 52 aftershocks killed an estimated 316,000 people. There was no immediate effect on stocks. The S&P closed as much as 6.6% lower 18 trading days later, but continued to rally thereafter.

3) Hurricane Katrina – August 29, 2005
Hurricane Katrina is said to have been the costliest natural disaster in the history of the United States. Property damage caused by the hurricane is estimated to exceed $80 billion.

Surprisingly the S&P greeted the hurricane with an eight-day, 3% rally. 38 trading days the S&P was 2.4% lower. In terms of stock market performance, the most costly natural U.S. disaster was no more than a footnote; it couldn’t even be picked out on a chart.

4) September 11 Attacks – September 11, 2001
9-11 is probably one of the most defining moments in United States history. Following the attack, U.S. stock markets closed and remained that way for the rest of the week. Once the market re-opened, the S&P lost 11.6% in four trading days.

The panic selling, however, was short-lived and the Dow Jones (DJI: ^DJI), S&P (SNP: ^GSPC), Nasdaq (Nasdaq: ^IXIC), and Russell 2000 (Chicago Options: ^RUT) recovered to pre-9-11 levels within a month. It is often omitted that the S&P had already lost 16% before the planes hit the World Trade Center.

5) Japan Earthquake – March 10, 2011
Even though the scope of the Japan earthquake has yet to be fully comprehended, there is no doubt that the combination of earthquake, tsunami, and nuclear meltdown will have a long lasting effect on Japan and that ripple effects could be felt the world over.

Two other events of interest are the Northridge earthquake, which hit Los Angeles on January 17, 1994. The stock market had no discernable reaction to this event and doubled over the next two years. The nuclear accident in Chernobyl on April 26, 1986 also had no noteworthy effect on stocks.

Purely based on a historic correlation analysis between (natural) disasters and the stock market, it appears that even catastrophic events do not alter the market’s performance.

If and when U.S. stock trading starts up again on Wednesday, the crowd waiting to trade will be like those Black Friday masses busting down the doors of Wal-Mart to get their hands on a $20 DVD player. Things could get ugly.

Everything could go smoothly, of course. But investors should be ready for the chance, however small, of volatile trading that could further rattle already shaky confidence in financial markets, with longer-term implications for the economy, and possibly the presidential election, if things get really messy.

“The last thing we can afford in this country is for capital markets to come online tomorrow and not have the ability to handle what happens, after 48 hours of being closed after a natural disaster,” said Dennis Kelleher, president and CEO of Better Markets, a financial-reform advocacy group. “It will compound all the bad trends in these markets.”

The New York Stock Exchange (NYSE) and Nasdaq plan to reopen stock trading on Wednesday, after closing for two days due to megastorm Sandy — the first two-day weather-related shutdown since 1888. The direct economic impact of the trading halt was probably near zero, aside from some lost trading revenue for banks, given its short duration and the fact that other markets stayed open around the world.

The shutdown didn’t exactly inspire confidence, however, in the ability of financial markets to handle the reopening. Some observers have wondered why the NYSE wasn’t prepared for an eventuality like Sandy. And a sloppy reopening could only make a bad situation worse.

The timing couldn’t be much less ideal. Stocks will be opening on the last day of the month, a period when mutual funds and other money managers typically shuffle their portfolios to try to hit performance targets. The reopening will come just days before the all-important October jobs report, due on Friday or later, depending on whether the Labor Department decides the report can be ready. And it will come less than a week before an election to determine the next president and the makeup of the next Congress.

On top of all that, a volatile market could also be fertile ground for high-speed trading robots looking to take advantage of discrepancies in prices to turn a quick profit, warned Kelleher.

“While everybody else is worrying about what happens with the disaster, I’m concerned you also have high-frequency-trading programmers figuring out how to take advantage of what will be a bunch of market anomalies whenever it comes back on line,” Kelleher said.

Stir in the possibility that the exchanges may not be fully up to speed — the NYSE has said it might go to all-electronic trading if necessary — and the fact that many traders may still be offline due to the storm, and you have the recipe for potential market chaos.

“The level of uncertainty that is created in the environment where there has been some level of disaster or catastrophe — that often creates volatility,” said Robert Iati, partner and head of global consulting at TABB Group, a market research firm.

The NYSE did not respond to a request for comment. Clearly, it has to get back to trading, sooner rather than later. For now, the economic impact of a couple days’ shutdown is “practically nothing,” said Tony Chernin, a finance professor at San Diego State University. A prolonged delay might affect confidence, and economic activity, more than a day or two of volatile trading.

Under the circumstances, it’s not unreasonable to be on the lookout for something more than volatile trading. There’s a small risk of something more like the Flash Crash of 2010, or the Facebook IPO debacle, or the Knight Capital trading disaster, to name just a few — episodes that have crushed investor confidence in U.S. capital markets, according to a recent TABB Group study. Retail investors have been pulling money out of stock mutual funds and pouring it into bond funds, even as the stock market has nearly doubled since 2009 and bond prices are near record highs. Investors’ lack of confidence is “causing them to make bad decisions,” Chernin writes.

Another such episode six days before the election would hardly be welcome news for President Obama. For the economy, it would further weaken faith in capital markets, ultimately making it harder for companies to raise money in the U.S.

“The funding of American businesses, real businesses that create real jobs, not paper shufflers on Wall Street, depends on deep, fair capital markets, and access to them,” said Kelleher, the president and CEO of Better Markets. “And when that goes away, the fuel that enables business in this country goes away also.”

So what are you going to do tomorrow when the market opens up tomorrow ? ME?? Like a Super Bowl MVP, I’m going to Disney World!!!!!


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