Markets and Impacts from Terrorism

stock marketsA wave of violence has been gripping the world for the past few months, including the most recent one in Nice, France on Bastille Day where 84 (and counting) had been killed from a lone truck driver whereby early reports are conflicted if ISIS was involved.  And then there was the killings in Orlando back in June that took 49 at the Pulse nightclub. And the incident at Istanbul’s airport killing 41.

With all this terrorism carnage it would be reasonable to think that global markets would panic and contract, with investors shifting investments into safer harbors.  However, historically this has not happened.  In the past 35 years there has never been a terrorist attack which has triggered a bear market (at least a 20% drop) nor one that has prolonged a downturn.  And that includes the disturbing events of America’s 9/11 tragedy.  Although, for that event stock markets did take a dip, the damage was short-lived, however, and markets rebounded soon after.

Analysis done by Ned Davis Research, going back to the 1970s, of 23 major global terrorism events showed that 75% of the time the Dow Jones Industrial Average was back up within a month’s time.  The Nice attacks, the most recent as of this writing, reveals the S&P500 is only down less than 0.25% while the Dow is down even less.  Could this mean investor’s empathies and fears run shallow when it comes to global tragedies?  Well, let’s try to analyze deeper.

Although it appears markets seem to be able to weather global terrorism well, the real reason might have something to do with how the Bank of Canada and the Federal Reserve of the U.S. already bake in bad news like terrorist attacks into their rate reports.

When 9/11 happened the Fed lowered short-term rates from 3.5% to 3%.  Because the U.S. was already experiencing a recession this was normal, but the Fed kept dropping rates aggressively to help pull the U.S. out of its funk by the end of 2001.

Terror threats and other global events that might have adverse effects on the global economy are one reason why the Bank of Canada and the Federal Reserve leave interest rates low for a while.  And these several recent terrorist attacks are a strong indication that rates will remain low for the rest of the 2016.

So while terror risks may give one pause and make one want to think about scaling back long-term investments it’s much better to realize that one is more likely to see a brief wave of short-run volatility before a market bounce is seen.

This article has 12 Comments

  1. Diya Mattingly

    This is a tough one because as you say people act irrationally in the face of global happenings. It's because of the less experienced who do have knee-jerk reactions and begin selling off is what makes the experienced react the same way — because they are forced to.

  2. Elton Combs

    This is why it is so important to just keep a diversified portfolio. To weather such events.

  3. Wesley Vergenson

    It's true that terrorism hasn't affected the stock market that much. The 2008 financial meltdown was another story. And that had nothing to do with terrorism. And that recession lasted for 4 years.

  4. Elbert Doolittle

    Attacks are becoming more often and more serious. It is only a matter of time before it does have big and long lasting impacts on the exchanges. Groups like ISIL are not dumb.

  5. Israel Y

    Terrorism, like inflation, like taxes is always going to be a ever present fact of life. This is the reason why it has no real bearing on the markets. It's because it's an always present thing. Yes the needle of concern will twitch a bit but as you pointed out indirectly in the study, human nature can't help itself, and will be compelled to go back to doing what it does best: being self-absorbed.

  6. Dixie

    One of the goals of Isis is to bring down first world nations by putting us in constant fears and making us ultimately spend (and bankrupt) our own nations trying to fight back. And so it seems logical that stocks should be affected negatively because ultimately a nation would spend more on militarizing itself for protection and bankrupt itself. 🙁

  7. Tavian

    It's interesting that one can only go back to the 70s and not earlier. And the late 70s is when markets became less regulated. Especially in the early 80s. I wonder if there is a direct correlation and reasoning.

  8. Clifton

    I thought about this also after Nice. Didn't see any changes at all. I was kinda thinking air travel stocks would take a small dive. Not even that. I understand France is isolated from the other markets but if an indiscriminate attack can happent here it can happen anywhere.

  9. Darrien L.

    Very sad that France keeps getting hammered like this. It was the bastion of Liberalism ideals and now it's slowly becoming a conservative place.

  10. Judah Mitchell

    Rates will be going up soon. Count on it!

  11. Dwayne

    Yup, when it comes to money it will take more than a body count to push the TSX/NYSE down. There really isn't much correlation. Sure people feel bad for a few days but after that they forget and the Dow sets record highs. The world moves on.

  12. Jaquez

    The real question is what if ISIS became organized to be able to infiltrate financial institutions and wire billions from nations? I would think that would result in global craziness.

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