Tsunami rocks Asia. Will the stock market plunge?

Tsunami rocks Asia

Tsunami rocks Asia. Will the stock market plunge?

Japan has been rocked by a colossal tsunami spawned from an earthquake estimated to be as high as 8.9 on the Richter scale. Massive 5 meter waves smashed into the shore, tearing apart buildings, snapping power lines and washing away cars. Hundreds of lives have been lost, and billions in damages have already been incurred.

The burning question many investors have is what effect will this have on the stock market? Should I get out of stocks? Should I convert everything to cash? Is it time to seek "higher ground" financially?

The best point of departure to address this question is to look at previous tsunamis. If there is an observable change in the stock market after a tsunami, then there would certainly be a legitimate basis to make such a claim. The assumption, of course, is that tsunamis cause the stock market to fall. But what do the facts say?

Here are the tsunamis I used for the study:

April 1, 1946 - The "April Fools" tsunami generated from a massive earthquake in Alaska.

November 4, 1952 - Kamchatka Tsunami which struck the Kuril Islands plus other areas along the coast of the Russian Far East. Spawned from a magnitude 8.2 quake off the coast of Kamchatka

July 9, 1958 A 8.3 magnitude quake in Lituya Bay, Alaska generated this massive tsunami. One of the largest in modern history, though loss of life was limited to two known deaths: Two fishermen were killed when their vessel sank.

March 9, 1957 - A colossal tsunami caused by an earthquake off the coast of Alaska. Spread to the Hawaiian islands, ultimately creating waves over 45 feet high.

May 22, 1960 Coastal Chilean quake produced a tsunami that struck with terrifying strength. Approximately 1,500 people were killed in Chile and subsequently in Hawaii as the wave propagated.

March 27, 1964 - A gargantuan 201 foot tsunami generated by the ironically named "Good Friday" earthquake.

Aug. 23, 1976 - A southwest Philippines tsunami which took 8,000 lives.

September 1, 17, 1992 - Quake off the shore of Nicaragua registering magnitude 7.0 created a tsunami which ultimately killed approximately 200 people.

July 17, 1998 - a magnitude 7.1 quake off the northern coast of Papua New Guinea spawned this huge tsunami which claimed 2,200 lives.

Dec. 26, 2004 Devastating Indian Ocean earthquake and tsunami which tore through Indonesia killing an estimated 230,000 people. One of the most destructive natural disasters in modern history.

Given the huge devastating impact of these tsunamis, it would seem plausible they could have a major impact on the market as well. This idea is certainly common among major news outlets. We often hear news analyts suggesting the market "plunged" as the tsunami devastated a region, much as we hear with earthquakes, floods and other major disasters.

But is this true? How exactly does the market react to tsunamis?

To find out I took a look at these 10 major tsunamis and matched the date of their occurrence with the Dow 30 (Dow Jones Industrials).

There were three intervals for which I tested:

First, the difference in the Dow between the day before and the day after the tsunami. Second, the difference between the day before and 10 days after the tsunami and finally the difference between the day before and 30 days after the tsunami.

I reasoned that if the "experts" were correct, we would tend to see a drop in the Dow between these time intervals.

Averaging the net percent change, I found that there was a decline of -0.14 between the day before and the day after the tsunamis struck. But, given the much larger standard deviation of 1.14 over the same time span it meant that this average percent change wasn't statistically significant.

The 10 day interval looked a little more promising in terms of significance. In fact the change was 0.58. However, in this case the change was positive, meaning the the Dow actually had a tendency to climb over the 10 day span following the tsunami. Unfortunately this change had no mathematical significance either.

The same turned out to be true of the 30 day interval. Though the Dow was up on average 0.68 percent, the natural variability in the market was more than adequate to explain that difference.

Ultimately all of the changes turned out to be insignificant mathematically. And even if they had been significant, in two of the cases we actually saw that the market tended to go up, not down, following a tsunami.

So the next time you hear an "expert" or analyst talking about the devastating impact a tsunami is likely to have on the markets just remember this little study. Better yet, crunch the numbers yourself and see if what they're saying has any basis in fact. Doing so will help you avoid making hasty investment decisions and keep yourself focused on a winning investment strategy.

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