United We Stand

Three times in 75 days, the forces of evil struck the United Kingdom, destroying lives and changing people forever. Our thoughts and prayers are with those whose lives, families, friends and property were directly affected, as well as the entire nation as it heals. We find ourselves writing words like this far, far too often-from London to Manchester, Paris to Nice, San Bernardino to Orlando, Berlin, Stockholm, St. Petersburg, Normandy, Norway, Egypt, Brussels, Copenhagen. But even as terror attacks become increasingly frequent, this we know: Demons who don't value human life-and the destruction and terror they sow-are no match for resilient, free people. Markets' increasing steadiness in the face of tragedies like this is a profound testament to the power of freedom and free enterprise to overcome those who seek to destroy our way of life.

When 9/11 happened, it was a legitimate shock to markets. The Western world had dealt with terrorism before, from Oklahoma City and the first World Trade Center bombings to Lockerbie and the IRA's campaign of terror, including the Manchester bombing in 1996. But 9/11 was on a massive scale and hit institutions of finance and government, shaking America's foundation. When the stock market re-opened on 9/17, the S&P 500 plunged 11.6% in 5 days.^[i] But on 9/24, markets turned back up. Though the dot-com bear market (which began way back in March 2000) would continue for another year, stocks enjoyed a powerful (though brief) rally. By 10/11, the S&P was back at pre-9/11 levels. At yearend, it was up 5.1% since 9/11.^[ii] The attack was horrific, but as time passed and America gritted her teeth and got on with it, investors fathomed the power of free societies' ability not to let terror block everyday life and commerce.

In a way, 9/11 inoculated markets against terrorism. It forced investors to confront the reality of a massive strike that killed thousands, and accept the possibility that it could happen again, at any time, with no warning. Markets have lived with that knowledge for 16 years now. The Madrid train bombings in 2004 and the 7/7 attacks in London the next year reinforced the risk. On both occasions, markets dipped the day of the attack, but quickly moved on. Society, of course, took longer to heal. But for markets, terrorism's surprise power was gone. Investors knew the score, knew what they were dealing with. As terrorist strikes became even more frequent during this bull market, their market-moving power sapped even further. UK stocks finished Monday a shade higher. France's CAC 40 fell -0.08% on 11/16/2015-the first trading day after the November 13 Paris attacks-but rose 2.8% the next day.^[iii] Germany's DAX rose 0.3% on 12/20/2016, the first day after the attack at Berlin's Christmas market.^[iv] Belgium's BEL-20 rose 0.2% the day of the Brussels bombings and inched up another 0.1% the day after.^[v]

Exhibit 1 shows just how much stocks have overcome terror during this bull market. We wish this weren't a lesson investors would need for the future, but we aren't blind to risk and reality. But as our leaders continue their efforts to eradicate the problem at hand, we believe freedom-and free people's solidarity, creativity and resilience-will prevail over those who would render destruction. And while market cycles will always be with us (and this bull market will one day end), overall and on average, we expect stocks to continue registering their own defiance by marching onward and upward.

Exhibit 1: Terrorism Is No Match for Free People and Free Markets

Source: FactSet, as of 6/5/2017. MSCI World Index, 3/9/2009 - 6/2/2017. Due to limited space, we included only major attacks in Developed or Emerging Markets or those headlines attempted to tie to markets. During this stretch, there have sadly been scores of attacks throughout the Middle East and additional attacks in America, Europe and Asia.