Terror’s Toll

What's wrong with British investors? Are they ghoulishly perverse? The very day after alert Brits neutralized not one, but two potentially devastating car bombs in central London—packed with gasoline and nails and intended to impart maximum damage—British markets had a perfectly prosaic positive day.

Not only were British stocks positive, the FTSE All-Share (think of it as the British S&P 500) outperformed the world overall and clocked US markets, which were negative that day. At MarketMinder, we continually counsel never to look at one day's market movement as evidence of anything at all, but British investor reaction last Friday is a good reminder of how markets react to terrorism: They don't.

The facts speak for themselves. Some may claim last week's incident hardly provides proof—perhaps the market was pricing in investor relief at a near miss—so let's examine other examples. The second anniversary of the London Underground bombing approaches—how did markets react then? The FTSE and world markets stumbled that day, but were positive for days and weeks after, finishing the year strongly. US markets were positive that very day! No reaction at all. How about the Madrid train bombings in March of 2004? Spanish markets were positive that day while US markets fell, breaking even just 5 trading sessions later.

The story's the same for other major terror attacks—Pan Am flight 103, Oklahoma City, the first World Trade Center attack, Khobar Towers, US embassy bombings in Africa, the Cole. The market wasn't necessarily always positive the same day, but it didn't take much time, just days, for markets to break even. Only the Cole happened in a year (2000) US stocks posted a loss—and we'd argue the market was discounting the impending recession and tech bubble, not reacting to the attack.

What about September 11? Didn't that lead to a recession and a terrific and unusually long bear market? Simply, no. According to the National Bureau of Economic Research (NBER—a great source of economic data—www.nber.org), the retraction began fully 6 months before the attack, and lasted a relatively short 8 months. In all—it was a pretty short and shallow recession, though that wasn't how the media played it.

As for the stock market, it's true it dropped precipitously the day the New York Stock Exchange reopened, but the market hit break-even after 19 days, and rallied strongly through the end of the year before the bear roared back. Did the attack impact the market in the short term? Undoubtedly, but it's hard to argue it had a long-term impact—since markets reopened in September 2001, global stocks have more than doubled. Markets 1, terrorists 0.

Nineteen days—that's all it took to breakeven, and that was after arguably the most surprising and devastating terror attack in modern history. Markets move on what's unexpected economically. Terror attacks impact sentiment in the very near-term—sentiment being an important market driver—but unfortunately, we just aren't surprised by terror anymore. Not only have we been living with it throughout the 20th and 21st centuries—as Israelis, British, and Spanish, among others, know all too well—but throughout human history. Terror's not a new tactic, and though the terrorists want to believe otherwise, they just don't have lasting economic impact.

As far as market risks go, this is one you may disregard—the market doesn't fear terror—nor should you. First, you cannot plan for it, but second, if and when there's another large scale attack, the market will likely largely shake it off as it's done throughout history—nothing perverse about that.