Doom and the Stock Market

January 11, 2012 • Posted in Animal Spirits

Is proximity to doom good or bad for the stock market? To measure proximity to doom, we use the “Doomsday Clock” “Minutes-to-Midnight” metric, revised occasionally via the Bulletin of the Atomic Scientists, which “conveys how close humanity is to catastrophic destruction–the figurative midnight–and monitors the means humankind could use to obliterate itself. First and foremost, these include nuclear weapons, but they also encompass climate-changing technologies and new developments in the life sciences that could inflict irrevocable harm.” We assume the atomic scientists issue changes in proximity to doom near the beginning of indicated years. Using the timeline for the Doomsday Clock since inception and contemporaneous annual returns for the Dow Jones Industrial Average (DJIA) during 1947 through 2012 (21 doom proximity judgments), we find that:

The following chart relates annual DJIA return to same-year “Minutes-to-Midnight” judgments as available over the sample period. For example, the 6-minute proximity to doom for 2010 relates to the 2010 DJIA return of 11.0%. The Pearson correlation between these two series is 0.39 and the R-squared statistic 0.15, indicating that beginning-of-year judgments of proximity to doom explain 15% of the variation in annual DJIA returns.

The doom proximity reading for 2012 is 5 minutes, indicating (via linear extrapolation using the formula in the chart) a return of -0.49% for DJIA in 2012.

 

We consider several robustness tests:

If we assume that proximity to doom for years not listed in the timeline is the same as the last issued judgment, the Pearson correlation is -0.03 and R-squared is 0.00, indicating no relationship between proximity to doom and stock market performance.

In case there is a delay between proximity to doom judgments and stock market behavior, we relate next-year DJIA return to “Minutes-to-Midnight” judgments as available over the sample period. The Pearson correlation reverses to -0.14 and the R-squared statistic 0.02, indicating little or no relationship.

In case the equity market may be sensitive to changes in proximity to doom, we relate annual DJIA return to same-year change in “Minutes-to-Midnight” judgments as available over the sample period. The Pearson correlation reverses to 0.05 and the R-squared statistic 0.00, indicating no relationship.

In summary, evidence from simple tests on limited data is mixed regarding the relationship between judged proximity to doom and stock market returns.

Cautions regarding findings include:

  • The sample of judgments for proximity to doom is small in combination with DJIA return variability, so confidence in findings is low.
  • The atomic scientists may not be representative of investors regarding outlook for doom.
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