Just how risk-averse is the U.S. stock market? A new survey by Thomson Financial and the World Economic Forum calculates what traders are most worried about – and it’s a bit surprising. On “Street Signs,” Erin Burnett spoke with Thomas Aubrey of Thomson and Chris McGee of the PRS Group about what could be the biggest risk to the market - and it isn't terrorism.
According to the study, which surveyed one thousand traders, bird flu is a significantly larger risk to the market than terrorism. Aubrey says the reasoning behind this is that a bird flu pandemic would affect employees in the financial sector around the world at the same time, whereas terror attacks tend to be location-specific and thus less disastrous for the market on a global level.
The survey compiled information about risk factors directly relating to the Dow Jones Industrial Average. If bird flu were to spread to 22 countries, the Dow would turn down 0.4%. But if it spread to 60 countries, the Dow would decline 10%, according to the survey.
Perhaps the most surprising part of the survey is that it only foresees the Dow dropping 10% following a global pandemic. In some schools of thought, 10% is a mere correction. The idea behind the report, and similar studies, is that they allow investors to price in that risk and then it mitigates the impact on the market, says McGee. While predictive market surveys like this are used to assess risks that are impossible to quantify, they are helpful for business managers to understand what's at stake and deploy their resources, Aubrey says.
Aubrey notes that the survey predicts that bird flu will indeed impact the financial markets this year. There have been 265 confirmed human cases of the lethal H5N1 strain of bird flu, and it is blamed for 150 deaths worldwide since 2003. So far, the strain has been found in 10 countries. It is currently spreading through Indonesia and has also recently been found in Egypt.