How Markets React to Major World Events
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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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.
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Disclosure: No positions at time of writing.