Did Ebola 'Cause' the October Sell-Off?

I've written somewhat sarcastically a few times about the degree to which Ebola "caused" the market ugliness in October. I didn't mean to minimize Ebola -- it's horrible. I just meant to highlight what I thought was a pretty unlikely causality.

I understand there's a societal mood aspect to market action. And, putting "we're all going to get Ebola" on the cable news networks 24/7 could certainly impact that mood. But anyone who took the 10 seconds to read anything scientific beyond the hyperventilation would have seen that the likelihood of an epidemic here, or anywhere in the industrialized world, was very remote. So, it seemed illogical that the market would react much to cable news. Perhaps I was wrong, though. This, from Business Insider:

Bloomberg chief economist Michael McDonough tweeted this chart overlaying the frequency of ebola-related newswire stories with the VIX, or the CBOE Volatility Index. The VIX, a rough measure of traders' fears spiked as the markets sold off and then receded when the markets came back.

As you can see, there's a pretty decent correlation between the number of Ebola virus stories and the magnitude of the VIX.

I stand corrected. There are always lots of moving parts in a market. This doesn't "prove" Ebola led to the CBOE Volatility Index (VIX) pop and market drop. But visually, that's a pretty strong relationship. In hindsight, this is really market dynamics 101 more than anything else. The market was clearly ready for a shakeout; all it needed was a catalyst. And then along came Ebola, and away we went. And then, as the Ebola fears receded, so did market fears as evidenced by the VIX.

But to me, it's still a mistake to assume there's a causality there. If Ebola had stayed at the top of the news a little longer, it's likely the market would have started to ignore it and rally anyway. That's because we never got around to the whole "discounting" step. That is to say, news stays bad, but the market has "fully priced it in" and we start rallying anyway. We never really got there. The Ebola news did indeed get better, but even it if had gotten somewhat worse first, the market would have started looking past it.

Anyway, that chart of the correlation really is pretty interesting. I just don't think there's that much to learn from it going forward. If Ebola strikes here again (and, look, it's likely, since it's not eradicated), I doubt it corresponds to any sort of market move. VIX will pop and the market will shake out again -- it always does. It will just have a different driver.

Disclaimer: Mr. Warner's opinions expressed above do not necessarily represent the views of Schaeffer's Investment Research.