Terrorism terrorises stocks: Fisher's financial mythbusters

The world is dangerous: terrorist thugs can reach us if they really want to. The good news is, while thugs can be deadly, they haven't taken down our vibrant economy or capital markets - and likely never will.

How do you know? It would be hard for any future attack to match the pure shock value of 11 September 2001.

Stocks did fall dramatically following the 9/11 attacks. The exchanges closed for days, and when they reopened on 17 September, the S&P 500 fell 4.9 per cent and kept falling the entire next week, down 11.6 per cent by 21 September.

But then they reversed course sharply. That's about the size of a small but normal correction within a bull market. By 11 October stocks were back at 10 September levels, and they largely traded above there for months afterwards.

DISMISSING TERRORISM'S IMPACT ON MARKETS

This wasn't a correction within a bull market; it was two-thirds of the way down, though a huge bear market that was already long underway. But the back of that bear market wasn't driven by the terror attacks.

How can we know? Look at similar attacks. On 11 March 2004, terrorists disabled the Madrid train system. Spanish stocks fell several per cent in the days following, but gained over 29 per cent for the year. Global stocks also fell that day, but hit pre-attack levels 20 days later and finished the year higher.

Then the London Underground was bombed on 7 July 2005: stocks barely flinched. By the end of the next trading day, the FTSE 100 was higher and would finish the year up 21 per cent. Global stocks were up 9.5 per cent in 2005.

How can markets be so dismissive of terrorism? The fact is, terrorism is tragic, but not a very new threat nor very significant in the grand scheme of the global economy.

STOCKS DON'T CARE

The 9/11 attack wasn't the first on US interests or even on US soil. Previously, we'd had the USS Cole bombing in 2000, the attack on the military barracks in the Khobar Towers in Saudi Arabia in 1996, and the first Twin Towers attack in 1993 - all by Al Qaeda.

But there was also Pan Am flight 103, bombed over Lockerbie, Scotland, in 1988, the attack on the US Marines' barracks in Lebanon in 1983 and the Achille Lauro in 1985.

Israel has dealt with a daily onslaught of terrorism for decades. The Irish Republican Army (IRA) menaced Britain for nearly a century - all while markets thrived. World War I was started by a terrorist act.

The US Marine Corps protected US shipping lines from the North African Barbary pirates in the very early 19th century. Simply, the power of terrorism to move markets has been, thus far, fleeting.

MARKET REACTIONS TO TERRORIST ATTACKS

Impact of terrorism on global stock marketsThe table (click to enlarge) shows market reactions following some more recent major terror attacks in the US and globally. On average, stocks are flat - slightly positive - the day after and positive in subsequent days. That shouldn't surprise, since stocks rise more than fall. Simply, the market isn't much terrorised by terror.

Terrorism is nothing new, but technological advances have made it deadlier. So what if some major new attack - say, a nut with a nuke - takes out a whole city? How can you use history to check that out?

It's imperfect, but consider: much of New Orleans was destroyed by Hurricane Katrina in 2005. The day it hit, the S&P 500 rose 0.6 per cent and world stocks were flat. And despite the damage, GDP was positive in the fourth quarter of 2005, as were US and global stocks.

WHY DID STOCKS SHRUG IT OFF?

The world market knew this tragedy, while brutal, wasn't big compared to global GDP, since all of Louisiana's GDP was just 0.9 per cent of US GDP and about 0.25 per cent of global GDP.

Since GDP normally might grow about 5 per cent in a normal year (nominal - with a few per cent inflation), this is too small at its worst to stop global growth or the stock market.

And while New Orleans wasn't a major economic centre, San Francisco definitely was when it was entirely levelled by earthquake and fire in 1906.

Of a population of 410,000, as many as 300,000 were homeless and the business and financial districts were flattened completely, with families living in tent camps around town. But the impact on stocks was negligible: they dropped just a bit in April, were higher in May and June, and had a fine year overall.

Terrorism's human impact can be massive. That's why terrorists choose those tactics. But fortunately, so far, their market impact has been relatively minimal at worst - fleeting at best. Capitalism is too strong a force to be kept back by cowardly thugs.

Ken Fisher is founder and chief executive of Fisher Investments.

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