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The Rising Thunder El Nino and Stock Markets

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The Rising Thunder El Nino and Stock Markets THE RISING THUNDER EL NINO AND STOCK MARKETS: By Tristan Caswell A Project Presented to The Faculty of Humboldt State University In Partial Fulfillment of the Requirements for the Degree Master of Business Administration Committee Membership Dr. Michelle Lane, Ph.D, Committee Chair Dr. Carol Telesky, Ph.D Committee Member Dr. David Sleeth-Kepler, Ph.D Graduate Coordinator July 2015 Abstract THE RISING THUNDER EL NINO AND STOCK MARKETS: Tristan Caswell Every year, new theories are generated that seek to describe changes in the pricing of equities on the stock market and changes in economic conditions worldwide. There are currently theories that address the market value of stocks in relation to the underlying performance of their financial assets, known as bottom up investing, or value investing. There are also theories that intend to link the performance of stocks to economic factors such as changes in Gross Domestic Product, changes in imports and exports, and changes in Consumer price index as well as other factors, known as top down investing. Much of the current thinking explains much of the current movements in financial markets and economies worldwide but no theory exists that explains all of the movements in financial markets. This paper intends to propose the postulation that some of the unexplained movements in financial markets may be perpetuated by a consistently occurring weather phenomenon, known as El Nino. This paper intends to provide a literature review, documenting currently known trends of the occurrence of El Nino coinciding with the occurrence of a disturbance in the worldwide financial markets and economies, as well as to conduct a statistical analysis to explore whether there are any statistical relationships between the occurrence of El Nino and the occurrence of a disturbance in the worldwide financial markets and economies. The purposes of this analysis are to discover if there is ii a relationship and to see how strong of a relationship exists; and the analysis will be considered a success if this paper can conclude if a relationship exists between El Nino’s and fluctuations in financial markets and economies. iii Acknowledgements First, I would like to thank all of the people in my life that motivate me to succeed. Those people include my Mom and Dad, my sister Tasha, my girlfriend Maribel, and all of my friends. I would also like to thank Dr. Michelle Lane and Dr. Carol Telesky for helping me tremendously down the stretch. Thanks! iv Table of Contents Abstract ............................................................................................................................... ii Acknowledgements ............................................................................................................ iv List of Tables .................................................................................................................... vii List of Figures .................................................................................................................... ix Introduction ......................................................................................................................... 1 What is an El Nino? ........................................................................................................ 2 History of Stock Market Panics in the U.S Coinciding with El Nino ............................ 7 Research Question: ......................................................................................................... 9 Hypothesis ...................................................................................................................... 9 Part 1: How an Economy is Affected by El Nino ............................................................. 10 Part 2: The Patterns of History.......................................................................................... 12 The Peruvian Guano Economy 1840-1879 and El Nino Related Collapse .................. 13 The Panic of 1857 and El Nino 1857 ............................................................................ 16 El Nino 1891 the Baring crisis of 1890-93 and U.S 1893 Panic .................................. 19 Part 3: Analysis of El Nino 1997-1998 on Financial Markets .......................................... 23 El Nino 1997-1998 ........................................................................................................ 23 Financial Crisis 1997-1998 ........................................................................................... 26 Method .............................................................................................................................. 34 Results ............................................................................................................................... 39 Entire Database ............................................................................................................. 39 El Nino Time Periods ................................................................................................... 41 v Discussion ......................................................................................................................... 47 Bibliography ..................................................................................................................... 51 Appendix ........................................................................................................................... 53 vi List of Tables Table 1: List of Panics in the U.S Coinciding with El Nino ............................................... 8 Table 2: List and Description of Areas of the Globe Impacted by El Nino ...................... 24 Table 3: Anova Table S&P 500 vs El Nino 1950-2015.................................................... 53 Table 4: Anova Table Mexico Stock Market vs El Nino 1991-2015 ............................... 53 Table 5: Malaysia Stock Market vs. El Nino 1994-2015.................................................. 54 Table 6: Hang Seng Index vs. El Nino 1987-2015 ........................................................... 54 Table 7: S&P 500 vs. El Nino 2006-2007 ........................................................................ 55 Table 8: Mexico Stock Market vs. El Nino 2006-2007 .................................................... 55 Table 9: Malaysia Stock Market vs. El Nino 2006-2007.................................................. 56 Table 10: S&P 500 vs. El Nino 1997-1998 ...................................................................... 56 Table 11: Mexico Stock Market vs. El Nino 1997-1998 .................................................. 57 Table 12: Hang Seng Index vs. El Nino 1997-1998 ......................................................... 57 Table 13: Brazil Stock Market vs. El Nino 1997-1998 .................................................... 58 Table 14: Nikkei 225 Index vs. El Nino 1997-1998 ......................................................... 58 Table 15: S&P 500 vs. El Nino 1986-1988 ...................................................................... 59 Table 16: England Stock Market vs. El Nino 1986-1988 ................................................. 59 Table 17: Nikkei 225 vs. El Nino 1986-1988 ................................................................... 60 Table 18: S&P 500 vs. El Nino 1982-1984 ...................................................................... 60 Table 19: S&P 500 vs. El Nino 1972-1973 ...................................................................... 61 Table 20: S&P 500 vs. El Nino 1968-1970 ...................................................................... 61 Table 21: S&P 500 vs. El Nino 1957-1959 ...................................................................... 62 vii Table 22: S&P 500 vs. El Nino 1952-1954 ...................................................................... 62 viii List of Figures Figure 1: Normal Westward Flow OF Wind And Water .................................................... 5 Figure 2: El Nino Related Reverse Of Westward Flow ...................................................... 6 Figure 3: ENSO SST Departure From Normal In Degrees Celsius.................................. 25 Figure 4: Stock Market of Thailand 1993-2000 ............................................................... 27 Figure 5: Currency of Thailand 1993-2000 ...................................................................... 27 Figure 6: Thailand Imports 1993-2000 ............................................................................. 29 Figure 7: Thailand Exports 1993-2000 ............................................................................. 29 Figure 8: Stock Market of Philipppines 1993-2000 .......................................................... 31 Figure 9: Philippines Imports 1993-2000 ......................................................................... 31 Figure 10: Philippines Exports 1993-2000 ....................................................................... 32 ix 1 Introduction Economic recessions and stock market selloffs occur on the average of once every three to seven years. In the economy of every nation, there are periods of economic growth and periods of decline, called recessions. During periods of growth, domestic production increases, business revenues and profits increase, banks remain stable, stock markets increase, and unemployment decreases. (Sherman, 1991) The growth economy is very satisfying and contributes towards increasing people’s income, job retention,
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