The Only Thing to Fear Is…Fear!

Thirteen years ago Thursday, Americans were tragically reminded terrorist attacks can happen at any time, without warning, and bring devastating loss of life. This is always true, but perhaps more on folks’ minds now with several Western leaders warning of the threat from US and EU passport holders fighting with ISIS in Iraq and Syria. For investors, being mentally prepared is important. We aren’t predicting an event (there isn’t any way to) and we pray the day never comes—but being aware of the possibility and potential market impact is key to maintaining discipline. Especially because your instinct might very well be to sell—yet history shows any market impact is typically fleeting.

Many folks take it as given that terrorist strikes on western soil are deeply negative for stocks—after all, the S&P 500 Price Index lost -11.6% during the first five trading days when markets reopened after 9/11, and full-year returns were -13%. Yet that -13% has far less to do with 9/11 than with the bear market that began nearly 18 months prior, on March 24, 2000, as the Tech Bubble burst. Stocks were down -17.3% in the year through September 10, 2001—before the planes hit. They actually rallied between 9/21 and the end of the year, as shown in Exhibit 1.

Exhibit 1: September 11^th Attacks

Source: FactSet, as of 9/11/2014. S&P 500 Price Index 1/1/2000-12/31/2002. Yellow shading denotes the trading day before the attack and the following 10 trading sessions.

Most other terrorist attacks have seen some volatility in the surrounding days, though to a smaller extent. In all cases, the reaction was short-lived—no terrorist attack has knocked a bull market off course, as shown in the eight charts below, which detail market activity surrounding terrorist attacks in the US, Europe and Japan over the last 30 years.

There are some fairly logical reasons for this history. Terrorism does impact investor sentiment, which is a market driver, but usually only briefly. Stocks are forward-looking, and they look to future economic growth, earnings and political factors, which usually aren’t disrupted hugely by the attacks. The 2001 recession began in March, half a year before the attacks, and recovery began in November—two months after. The attacks did impact the political environment—namely through the Patriot Act and Afghanistan War—but they had nothing to do with the dastardly Sarbanes-Oxley Act, which bears much of the blame for the market’s continued dive through October 2002. Though investors don’t forget when attacks occur during bull markets, as time goes on they realize the economic impact is limited—they see growth continue, they see companies remain profitable, and they see their country’s spirit is too strong to be broken by evil. These realizations give stocks relief from whatever wobbles they endured in the attack’s immediate aftermath. 

Exhibit 2: Pan Am Flight 103

Source: FactSet, as of 9/11/2014. MSCI World UK Price Index 12/21/1987-12/21/1989. Yellow shading the trading session the day before the attack and following 10 trading sessions.

Exhibit 3: First World Trade Center Bombings

FactSet, as of 9/11/2014. S&P 500 Price Index 2/26/1992-2/25/1994. Yellow shading denotes the trading session prior to the attack and following 10 trading sessions.

Exhibit 4: Tokyo Sarin Gas Attacks

Source: FactSet, as of 9/11/2014. MSCI Japan Price Index 3/21/1994-3/20/1996. Yellow shading the trading session prior to the attack and following 10 trading sessions.

Exhibit 5: Oklahoma City Bombing

Source: FactSet, as of 9/11/2014. S&P 500 Price Index 4/19/1994-4/19/1996. Yellow shading denotes the trading session prior to the attack and following 10 trading sessions.

Exhibit 6: Irish Republican Army Attacks on Manchester

Source: FactSet, as of 9/11/2014. MSCI UK Price Index 6/15/1995-6/13/1997. Yellow shading denotes the trading session prior to the attack and following 10 trading sessions.

Exhibit 7: Madrid Train Bombings

Source: FactSet, as of 9/11/2014. MSCI Spain Price Index 3/11/2003-3/11/2005. Yellow shading denotes the trading session prior to the attack and following 10 trading sessions.

Exhibit 8: London Transport Bombings (7/7)

Source: FactSet, as of 9/11/2014. MSCI UK Price Index 7/7/2004-7/7/2006. Yellow shading denotes the trading session prior to the attack and following 10 trading sessions.

Exhibit 9: Boston Marathon Bombing

Source: FactSet, as of 9/11/2014. S&P 500 Price Index 4/13/2012-4/15/2014. Yellow shading denotes the trading session prior to the attack and following 10 trading sessions.