What investors need to keep in mind
The recent, horrible terrorist attacks in Paris remind us not only of the sadness of terrorist cruelty, but they also prompt consideration of the potential effects on the financial markets. How do global markets react to terrorist attacks? Should I change my investment plans?
Terrorist Attacks in Recent Years
Part of the intent of terrorist attacks is to scare people from visiting public places, shopping, or vacationing. As a result, these attacks can hamper the economy. Because markets detest uncertainty, there is an initial, knee-jerk reaction in the downward direction. However, markets have shown their resilience, investors return their focus to economic fundamentals, and growth begins again.
A list of major attacks of recent years begins, of course, with the Sept. 11, 2001 attacks in the U.S. The list continues with the March, 2004 train bombings in Madrid; July, 2005 London subway bombings; April, 2013 Boston Marathon bombings; and now the Paris attacks.
The negative impact on stock markets has diminished with each major terrorist attack since the 9/11 attacks.
After 9/11, the New York Stock Exchange remained closed for four trading days. After the NYSE reopened on September 17, stocks declined and fell for the remainder of the week. The S&P 500 declined by 5.0% that day. The Dow Jones Industrial Average fell 7.1% on the first day and declined by 14% by week’s end. Beginning the next week, however, stocks began a sustained rally over several months, lasting into January, 2002.
After the March, 2004 series of coordinated train explosions in Madrid, Spain’s IBEX 35 share index closed 2.2% lower. U.S. stocks had already been trending lower. The S&P 500 bottomed a few trading days later and then began to rise. Other global markets fell immediately but regained their strength the following week. The IBEX 35 increased 9.5% by year end.
In July, 2005 bombs went off in the London subways and on a bus. Britain’s FTSE 100 index fell 4.0% the first day. Although stocks initially fell, the markets rose past the pre-attack levels in under a week. U.S. stocks fell early that day but ended the trading session almost 1% higher. The FTSE 100 index rose 5.1% at year end.
After the April, 2013 attacks during the Boston Marathon, the S&P 500 fell sharply during the day. However, the index rose 1.4% the following day.
The stock exchange indexes for New York, Spain, and Britain all began to grow soon after the terrorist attacks. With each ensuing attack, the markets took less time to recover from their initial declines.
Effect of Paris Attacks
Despite the shock of the terrorist attacks, global markets remained strong. The attacks occurred on Friday, November 13. At the close on Monday, November 16, the first market day after the attacks, the French Index CAC 40 closed only 0.1% lower. It then rose for the remainder of the week. The European Stoxx Europe 600 Index rose by 0.3% on Monday. In the first week after the attacks, the SPDR S&P Emerging Europe ETF rose by 3%. Because the attacks happened over the weekend, markets may have benefitted from investors having time to analyze and reflect.
The markets have sustained less damage due to terrorist attacks in ensuing years, for several reasons.
First, the sheer scale of the Sept. 11 attacks distinguishes them from the more recent attacks. The attacks hit two important cities simultaneously. Over 3,000 people died, two giant skyscrapers fell, and the Pentagon was hit. The terrorists hit the center of the financial world and the headquarters of the world’s most powerful military.
Second, the markets are no longer as shocked by these attacks because they have become used to it. Sad, but true. Third, investors have found that, horrific as they may be, these atrocities have relatively little economic impact.
While terrorist atrocities still shock individuals and governments, the market moves on relatively quickly.
Many factors affect the financial markets. Be sure to consult your team of qualified tax, legal, and financial professionals for specific guidance.
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