We all know we have a recurring problem in the United States. However, the proposed solutions to this problem become increasingly polarized as each day passes, exhausting Facebook feeds and straining mass media journalists until they’re blue in the face. To the public, these shootings are the aftermath of some specific variable in our society that can be picked out and scrutinized. To the US equity markets, these shootings are a catalyst for short term swing trading.
This post is not a podium to preach my political beliefs, only to inform those who are unaware of a disturbing phenomenon that occurs almost every time a mass shooting or mass casualty event happens in the United States.
First, let me define ‘Event Driven Strategy’. An event driven strategy is an investment strategy in which hedgefund managers, mutual fund managers, institutional investors, and individual traders use real life current events to take advantage of a mis-pricing of a security’s value. For example, news comes out that Pharmaceutical Company A acquired FDA approval for their new drug, investors will buy into this security once news reaches the public air, and then sell the security after it rises in value. This is a strategy that no one would use a large portion of their fund for, due to risk and the increase in volume and volatility that always occurs.
However, when an ‘event’ becomes so predictable and so routine, it’s almost irresponsible to ignore this strategy.
The above graph shows the percentage growth of gun background checks conducted over a period of 16 years. Notice also that the most widely reported tragedies are highlighted on the timeline.
You can see up until 2008, percentage growth in gun background checks remained fairly constant in the 0-20% range until President Obama was elected, but even then, the largest growth occurred in 2013, after the Aurora, CO shooting and slightly before the Sandy Hook shootings.
Keep in mind, gun background checks are a prime instigator for gun demand. The more the U.S. Government pledges to restrict access to weapons, the more gun owners and advocates stock up their inventories.
This is a key point.
Mass shooting=heartfelt speeches from politicians=More background checks=gun demand increases= more people buy weapons=weapons manufacturers beat revenue and earnings estimates=security prices skyrocket=more lobbying from the weapons industry=legislation becomes stale=people forget about it=repeat.
This cycle has become so shockingly repetitive that any person in front of his/her computer could take advantage of the security’s mis-pricing, and pocket a very nice ROI.
What does this mean ethically? Basically, people are profiting off of other innocent victims’ tragedies. In fact, even if ‘event driven strategies’ didn’t exist, weapons manufacturers are still profiting off of the mass hysteria and emotional confusion that happens after one of these tragedies happen by using the fear instilled in 2nd Amendment advocates as a business model.
What does this mean psychologically? Investors know this cycle. After the horrific Orlando night club shootings left 49 dead and 53 wounded, Smith and Wesson securities shot up an incredulous 7% the following Monday morning. Any experienced trader knows where to put their capital after a mass casualty event, and the willingness to do so proves that we as a society have become nearly numb to these news stories.
What does this mean objectively? I don’t know. I don’t claim to know a solution to this, and I probably will never know a solution. Until we, as a civilization, engineer a solution, one victim’s death will be another investor’s percentage point of cash flows.
Auburn University Global Asset Management Program 