Collapse of the Polar Vortex
As 2014 gets under way, investors and market watchers are digging through analyses and research for some insight as to what may be in store for the year ahead. Clearly, they need look no further than their local meteorologists for direction.
Early January brought an arctic cold snap to most of the continental US like it hasn’t seen in many years. In plain language the scientific explanation is that, in winter, the stratosphere cools with less solar UV radiation. That temperature difference creates a vortex. Last week, the jet stream dislodged part of the vortex, causing it to collapse and move south. Voila. Icy cold air put an instant freeze on our everyday lives. Most people had probably not even heard of the polar vortex before that.
As the wave of frigid air marched across Lake Erie it dumped 20 inches of snow on Buffalo, New York and more or less ice-coated everything in the neighborhood of Niagara Falls.
The practical messages are direct: What we should fear most about the markets is the “unexpected” event, the black-swan, the collapse of the polar vortex.
Our second take-away is when arctic air arrives stay out of it. When the markets become inhospitable, for whatever reason or bad luck that comes along, stay safely on the sidelines and wait it out while the ice melts.