How Markets React to Major World Events

by on May 20, 2014

The ups and down on Wall Street have frustrated as well as captivated countless investors over the years. The notion of “panic selling” is one phenomenon that continues to pose a challenge for even the most seasoned market veterans; after all, one of the most difficult feats an investor can pull off is to remain calm and collected in the face of volatile trading and rampant pessimism in the marketplace [see Do Volume Spikes Signal Trend Reversals in the SPDR S&P 500 (SPY)?]

To see how quick investors are to respond to worrisome developments, and more importantly to show the magnitude of their reaction, we profile the returns of the S&P 500 Index after more than a dozen major events. More specifically, we take a look at how the markets reacted on the “Day Of” the event, which spans from the close of the previous day, as well as how the benchmark performed one week and one month after the initial reaction.

Note that the “5-Days After” and “20-Days After” performance figures refer back to the closing prices on the day of the event itself (i.e., the denominator in the calculation is the first closing price after the event occurred). These returns are based on adjusted daily closing prices. 

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10/22/1962: Cuban Missile Crisis
Day Of
-1.13%
5-Days After
-0.76%
20-Days After
8.84%

11/22/1963: JFK Shot
Day Of
-2.81%
5-Days After
5.82%
20-Days After
6.03%

8/15/1971: End of Gold Standard
Day Of
3.21%
5-Days After
-0.44%
20-Days After
1.33%

10/17/1973: OPEC Oil Embargo
Day Of
-0.20%
5-Days After
-0.20%
20-Days After
-5.10%

8/8/1974: President Nixon Resigns
Day Of
-1.31%
5-Days After
-5.93%
20-Days After
-13.12%

12/27/1979: Soviet Union Begins Military Occupation of Afghanistan
Day Of
0.17%
5-Days After
-2.54%
20-Days After
5.32%

3/30/1981: Attempted Assassination of President Reagan
Day Of
-0.27%
5-Days After
0.90%
20-Days After
0.89%

10/19/1987: Black Monday
Day Of
-20.47%
5-Days After
10.40%
20-Days After
9.25%

8/2/1990: Iraq Invades Kuwait
Day Of
-1.14%
5-Days After
-3.74%
20-Days After
-7.76%

9/23/1998: Long-Term Capital Management Bailed out for $3.6 Billion
Day Of
-2.19%
5-Days After
-2.47%
20-Days After
2.61%

3/24/1999: NATO Launches Air Strikes on Yugoslavia
Day Of
0.51%
5-Days After
2.54%
20-Days After
5.32%

9/11/2001: Terrorist Attack Brings Down Twin Towers
Day Of (9/17 markets re-opened)
-4.92%
5-Days After
-7.02%
20-Days After
5.09%

3/20/2003: US Military Launches Operation Iraqi Freedom
Day Of
0.19%
5-Days After
-0.65%
20-Days After
0.48%

3/11/2004: Terrorists Bomb Madrid Train System
Day Of
-1.52%
5-Days After
1.53%
20-Days After
3.05%

12/26/2004: Indian Ocean Tsunami
Day Of
-0.43%
5-Days After
0.58%
20-Days After
-3.42%

8/29/2005: Hurricane Katrina Devastates U.S. Gulf Coast
Day Of
-0.32%
5-Days After
2.07%
20-Days After
0.60%

9/15/2008: Lehman Brothers Files for Bankruptcy
Day Of
-4.71%
5-Days After
5.23%
20-Days After
-24.61%

5/6/2010: Flash Crash Hits Wall Street
Day Of
-3.24%
5-Days After
3.86%
20-Days After
-2.24%

3/11/2011: Japan's Coastline Devastated by Tsunami and Earthquake
Day Of
-0.60%
5-Days After
-1.33%
20-Days After
2.45%

3/3/2014: Russian Military Buildup in Crimea Raises Concerns Over Conflict with Ukraine
Day Of
-0.74%
5-Days After
1.75%
20-Days After
0.64%

The Bottom Line

When it comes to digesting “bad news,” investors tend to exaggerate their negative reaction. What this means is that a worrisome development, such as a natural disaster, is likely to inspire an immediate bearish reaction that often leads to a negative performance that day. However, as the cases above demonstrate, negative overreactions are generally followed by a resumption of the trend that persisted prior to the “bad news.” In other words, worrisome events can rattle investors’ confidence in the short-term, but it’s important to analyze their significance before assuming the impact will have a long-lasting effect. 

Follow me on Twitter @SBojinov

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Disclosure: No positions at time of writing.