Once Again: Calamity Strikes, Markets Overreact

The disaster underlines the tendency of traders to overreact to headlines.
Photographer: Mohd Rasfan/AFP/Getty Images

The disappearance of Malaysia Airlines Flight 370 is a mystery and a tragedy. The world should be focused on finding the plane and increasing safety and security in the industry. Markets, however, are remorseless, and don't pause for calamity. Shares of Malaysian Airline System Bhd., the airline's parent company, initially fell by 16 percent. Prices have since rebounded, but the massive decline is a reminder of the way we fallible humans tend to respond to things we don't understand.

Traders often overreact in these situations: In the aftermath of the earthquake and tsunami that struck Japan three years ago, Japanese stocks fell by about 18 percent, and expats fled because of fears that radiation poisoning would render Japan unlivable for generations. But while the damage and loss of life were horrific, the actual economic impact didn't justify that kind of market response. In fact, radiation levels in Tokyo are now lower than they are in London or Paris.

Or consider what happened to the value of U.S. airlines after the terrorist attacks of Sept. 11, 2001. After U.S. stock markets reopened on Sept. 17, shares in American Airlines Group Inc. were down by 39 percent, while shares in United Airlines Inc. had lost 49 percent of their value.

Much of the U.S. airline industry ended up going through bankruptcy in the years after the attacks, which may make you think traders were sensibly frightened by the news. But the actual sources of unprofitability were uncompetitive labor compensation practices and soaring oil prices, not losses associated with terrorism. To the extent that markets got the prices right, it was luck rather than an accurate appraisal of new information.

That experience may be relevant to Malaysia Airlines, which has seen its market value fall by about 72 percent since the beginning of 2011 even as the Malaysian stock index gained about 24 percent. (The airline is majority-owned by the Malaysian government's strategic investment fund, so outright bankruptcy probably isn't in the cards.) Some analysts think the troubles can be blamed on discount carriers that undercut Malaysia Airlines in its core market.

But growing revenues and rising numbers of passengers suggest that the real responsibility falls on the airline's mismanagement of its planes and the same kind of uncompetitive compensation practices that burdened U.S. carriers before they restructured.

If Malaysia Airlines gets into more financial trouble, it won't be because of one lost flight, no matter how tragic that experience may be.

(Matthew C. Klein is a writer for Bloomberg View. Follow him on Twitter at @M_C_Klein.)

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.