Doom and the Stock Market
February 6, 2015 • 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 we are to destroying our civilization with dangerous technologies of our own making. First and foremost among these are nuclear weapons, but the dangers include climate-changing technologies, emerging biotechnologies, and cybertechnology that could inflict irrevocable harm, whether by intention, miscalculation, or by accident, to our way of life and to the planet.” Using the timeline for the Doomsday Clock since inception and contemporaneous annual returns for the Dow Jones Industrial Average (DJIA) during 1947 through 2014 (22 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 based on two assumptions:
- Changes in “Minutes to Midnight” occur near the beginning of years. For example, the 5-minute proximity to doom for 2012 relates to the 2012 DJIA return of 7.3%%.
- When there is no change for a given year, “Minutes to Midnight” is that same as the most recently issued judgment. For example, the proximity to doom for 2013 and 2014 is the same as that for 2012.
The Pearson correlation between these two series is -0.05 and the R-squared statistic 0.002, indicating practically no relationship between proximity to doom and annual DJIA returns.
Might there be a lag between proximity to doom and stock market return?
The next chart summarizes annual correlations between “Minutes to Midnight” and DJIA annual return for lead-lag relationship ranging from DJIA return leads proximity to doom by five years (-5) to proximity to doom leads DJIA return by five years (5). All correlations are too small to indicate any relationship.
In summary, evidence from simple tests on limited data does not support belief that proximity to doom as judged by the Bulletin of the Atomic Scientists has any relationships with past or future stock market returns.
Cautions regarding findings include:
- The number 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.
- The proximity to doom metric is too vague for investors to interpret.
The doom concept does, however, have its uses.