Was there really a Cuban Missile Crisis?
Lars Christensen, aka the market monetarist, has a great post over at his blog on whether or not the Cuban Missile Crisis should really have been so worrying. A stupid question, you might think, but he shows that the equity markets did not crash anything like as much as they would have been expected to do if a true catastrophe was likely.
What really happened, however, was that S&P500 didn’t drop – it flatlined during the 13 days in October 1962 the stand-off between the US and the Soviet Union lasted. That to me is pretty remarkable given what could have happened.
Why didn't the markets think the world was going to be destroyed—and with it the value of big companies. Why didn't investors rush to put all their money in gold, underground bunkers, canned goods and guns?
There might be a number of reasons why we didn’t see a stock market collapse during the standard-off. Some have argued that the crisis was an example of what have been called Mutual Assured Destruction (MAD). Both the US and Soviet Union knew that there would be no winners in a nuclear conflict and therefore none of them would have an incentive to actual start a nuclear war. It might be that investors realised this and while the global media was reporting on the risk of the outbreak of the third World War they were not panicking (contrary to popular believe stock markets are a lot less prone to panic than policy makers).
Another possibility is of course that the markets knew better than the Kennedy administration about the geopolitical risks prior to the crisis. Hence, the stock market had already fallen more than 20% in the months prior to Kennedy administration’s announced that the Soviet Union was putting up a nuclear missiles in Cuba.
And it's worth reminding those who are sceptical what actually happened.
And the market was of course right – there was not third World War and after 13 days of tense stand-off the crisis ended.
For more commentary, read Pete Spence at City A.M. and the rest of Lars' post.