5 Worst Disasters - How Did the Stock Market React

With Hurricane Harvey making landfall and interrupting oil production, how does this affect the markets? Here is a look back at the 5 Worst Disasters - How Did the Stock Market React?

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.

Please note that the intent of this article is not to minimize or over emphasize the extent of one event over another. The events below are sorted based on perceived effect on the U.S. economy.

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 that is the case, what is the reason behind the 23% drop in Japan's Nikkei (NYSEArca: EWJ)? How much will Japan's devastation affect the U.S. stock market?

Assessing the Ripple Effects of the 'Tsunami'

One reason that may help explain the steep decline in Japanese equities is sentiment. Extreme optimism is one of the most bearish forces known to the markets.

93% of Nikkei 225 Futures traders were bullish just days before the earthquake hit. This was not just a one-day spike of bullishness, it had been accumulating for weeks and reached the highest reading since the Nikkei's 2007 highs.

Extreme bullishness over prolonged periods of time is troublesome because it turns potential buyers into owners. The only thing a stocks owner can do is sell.

Following the 2007 highs - both in terms of price and sentiment reading - the Nikkei declined more than 50% without the 'help' of an earthquake. Sentiment extremes are not unique to Japan's market.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.