Imagine a natural disaster so big that the damage equaled 15% of a country’s GDP. Would it affect that country’s main stock index?
Let’s look at a real-life historical example. Try to guess when a devastating earthquake hit on this chart of the country’s leading stock index:
Mid-’90s top? 2007 peak? Those seem like rational guesses — if outside events really drove stock market trends.
Our April 2011 Global Market Perspective noted:
On February 27, 2010, the sixth largest earthquake ever recorded by a seismograph struck Chile.
And yet … Chile’s stock market fell merely 3% over the next three trading days and then made up all those losses over the next seven. The effect on the stock market’s long-term pattern was almost imperceptible.
As you can see on the weekly chart below, the Chile General Index continued sideways for a few months after the earthquake and then rallied for about a year before experiencing a correction.
The takeaway: external events do not drive market trends, no matter how dramatic they seem.
So, what does drive stock market trends?
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