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Terrorists Be Damned

By Benjamin Shepherd on March 23, 2016

Yesterday, terrorists successfully struck Brussels, detonating at least two bombs in the city’s airport and another in the Maelbeek metro station, close to the European Parliament building. As it stands now, 31 people are confirmed dead and at least 270 are reported injured, with the death toll likely to rise in the coming days. Today we mourn the dead, for Belgium and all of those affected by the attacks.

Although terrorism devastates its victims and disorients a society, the effect on the market is often surprisingly muted. It may seem in poor taste to even think about what effect terrorism has on the stock market, but the concern is perfectly valid because the attacks often target economic centers.

On Sept. 11, 2001, the S&P 500 fell 5% before trading was halted, with the index bottoming out at
-13.5% once trading resumed six days later. Despite how late in the year the attack came, the benchmark still finished the year up 5.1%. Similarly, the market bottomed out over four days following the 2013 Boston Marathon bombing and regained all lost ground in only about two weeks. After the 2005 subway bombings in London, the FTSE 100 dropped 4% but finished the year with a 7.4% gain. The Indian Sensex index ended 2008 up 10.9%, despite the Mumbai hotel attack that year. And the list, unfortunately, goes on.

European stocks were broadly lower yesterday, but as I write this one day later Belgium’s main index is actually slightly up along with the German DAX while France’s is down slightly and London’s is flat. Our own S&P 500 gave up about 0.1% on the day of the attack and is down again today, but that’s mostly because of weak oil and commodity prices. This puts the current score at Terrorists-0, Free Markets-Unbeaten.

Western-style capitalist democracies and markets are amazingly resilient, something the terrorists don’t seem to grasp. We may tighten security following an attack, but life goes on in an oddly uninterrupted way. It’s not that we don’t care—we just refuse to let the terrorists win.

Suspending business at an attack’s epicenter for a time doesn’t destroy that economy. Tourists still flock to New York City, London, Mumbai and Paris. Markets still function and millions of people go to work every day. While I was researching the effects of terrorism on the economy and markets, I even found that a few economists like Paul Krugman say that terrorism might actually boost economies, as security spending ramps up and redevelopment occurs.

That doesn’t mean terrorism isn’t a potential threat to our portfolios. If a major coordinated attack happened, especially one involving nuclear or biological weapons, it’s a pretty safe bet the market would react significantly. Such an attack might even disrupt the economy, so holding at least some gold and U.S. Treasurys isn’t a bad idea; they hedge against pretty much anything barring a total economic collapse.

The sad fact is that terrorism is becoming all too common the world over, but with some prudent hedges, these attacks won’t leave you with much to worry about financially speaking.

 


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