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Tsunami slams Japan. What's next for stocks?

A deep water tsunami has just struck Japan and thousands of miles of vulnerable shoreline. Massive waves crushed buildings with ease and lifted multi-ton trucks like they were toys in a bathtub.

Will this have a devastating effect on the markets as it has on lives and property in Japan?

What effects do tsunamis and other disasters have on the market anyway?

Writing for The Street, Shanthi Bharatwaj claims that that the tsunami that struck Japan was instrumental in "triggering a sell-off in Asian and European stocks and putting nations across the Pacific and the U.S. West Coast on high alert."

And, according to the Economic Times, "World markets went into a tailspin today as tremors from the devastating earthquake and tsunami in Japan shook investors' sentiment."

But, how can they be so sure? Do we have any real evidence that tsunamis have caused the markets to plunge?

To find out I Googled "major tsunamis" and collected all that I found from the first page of results.

I then found the date they occurred on the Dow Jones Industrials data and noted the Dow price the day before and the day after the tsunami. I also checked the the price 10 days out and 30 days out. For intervals which fell outside trading days I just chose whichever trading day was closest.

What I found was rather interesting:

In fact the tsunamis didn't really have much effect on the markets at all, but the small effect they did have was probably the reverse of what many would expect.

Initially there was a slight tendency to turn down. Of the 10 tsunamis I analyzed, the average percentage loss was -0.14. But this can hardly be considered significant. After all the standard deviation for daily percentage changes in the Dow data is 1.14. So it is well within expected variability.

From a statistical point of view the conclusion we would draw is "no known effect".

Looking out 10 days what we see is there is an average increase of 0.58 percent. This is quite a bit farther from zero. But unfortunately for 8 trading day intervals (a necessary 2 day adjustment from calendar days) the standard deviation for percent changes also increases. In this case the value is 3.16.

So again for the 0.58 percent increase we see after 10 days we are well within normal variability and we just can't draw any conclusion.

And the same is true of the 0.67 percent average increase we see after 30 days.

So, all in all, we saw a slight drop in the Dow between the day before and the day after the tsunami. Then we saw a moderate increase after 10 days, followed by a slightly greater increase after 30 days. But none of these changes can be considered significant.

It would be very exciting to be able to say tsunamis cause big changes in the markets (and especially to say the market actually went the opposite direction from that expected) but unfortunately we really can't draw any conclusion at all.

Chances are tsunamis are just like most natural (and human-made) disasters: They just don't seem to have an effect one way or the other on the stock market.

So the next time you hear a financial journalist claiming a tsunami has "caused" the markets to plunge, take a step back and ask yourself if the data really supports that claim. Run the numbers yourself if you have any doubts.

Doing so will help you stand clear of the hype and stick with your investment plan.

Posted by Aneka Tips on 10.19. Filed under . You can follow any responses to this entry through the RSS 2.0. Feel free to leave a response

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