Solar Storm Threatens the Stock Market?

Reports from NASA indicate a huge solar storm coming from the Sun. Apparently these geomagnatic flares can affect telecommunication lines, satellites, power grids, and navigation systems. Stock market returns over the past 35 years also suggest that solar storm may be behind the declines in the stock market. There are probably some finance professors -who don’t have anything better to do- working on the effects of solar storms. It shouldn’t be very difficult to find a pattern.

Solar storms follow a 11-year cycle. The last time we hade solar storms was in 2001 and the S&P 500 index lost 13%. Prior to that S&P 500 index lost 6.6% in 1990. 1979 wasn’t a great year either. S&P 500 index returned 12.3% that year but the average inflation rate in 1979 was 12.6%. So, stock market investors actually lost in terms of purchasing power of their nest eggs.

Do you think it is just a coincidence that three of stock market’s worst years were during solar storms? We do. It is called data mining. When you analyze any time series data set you are bound to find some pattern and you can always make up a story that “explains” the pattern you discovered. We have so many of these patterns. For example, the September Effect. Historically September is the worst month for the stock market. Do you remember the last September? Stock market hit the bottom. Do you think it was just a coincidence? We do. The stock market did well in September 2009 and 2010.

The best thing investors can do about these “predictions” is to ignore them. Just focus on cheap stocks with solid businesses and don’t worry about the solar storms or short-term bumps.

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