Daniel Lew: The impact of catastrophic events on global markets depends on their perceived relevance by Wall Street professionals and the perception of their impact on (company) valuation.
When news of a disaster directly affects economic activities, for example by disrupting supply chains or causing significant damage to key industries, it can lead to immediate market reactions. Wall Street professionals assess the potential economic consequences by considering factors such as the severity of the event, the economic importance of the affected region, and the expected duration of the disruption.
If the event is considered a short-term disruption with limited long-term economic implications, the market may experience a temporary decline and then recover. Conversely, if the disaster is perceived to have lasting consequences, investors might react more drastically, leading to widespread selling.
Additionally, the answer often depends on whether the event aligns with existing market narratives or contradicts dominant expectations. Unexpected events are more likely to disrupt the market.
It is also important to note that some disasters are covered by insurance or government support, which is often financially stimulating and provides opportunities for businesses well placed to help rebuild the local economy.
As an example, the September 11 attack on the World Financial Center was very disruptive because New York is one of the major financial centers. Markets immediately fell and were even closed for the short term, but as the government stepped in to provide support and the Federal Reserve ensured monetary stability and liquidity, markets recovered and emerged from the slide to ultimately reach new heights.
As a second example, the devastating floods in Libya in September, which killed more than 10,000 people, while horrific, appear to have had little overall impact on global stock and bond markets, but nonetheless led to a temporary surge oil prices while Libya is in the middle of a crisis. one of the world’s leading oil producers.
