by David Moon
In the hours following the Brussels terrorist attack this past Tuesday, US stock futures immediately declined in pre-market trading. Most media outlets attributed the drop to reaction to the attacks. Asian and European currencies also declined as investors around the world moved money into a perceived safe haven, the US dollar.
By the end of the day, however, stock prices had slipped less than 0.25 percent.
Discussing the financial reaction to a tragic human event, especially as the details are still developing, is cold and insensitive. It is also a common reaction on Wall Street and Main Street.
The US markets completely ignored the November 2015 ISIS attacks in Paris. The Dow Jones Industrial Average jumped 238 points the day following, its then-largest gain in almost a month.
In the first trading day following the 9/11 attacks, however, the Dow Jones Industrial Average dropped 7.1 percent. That drop was short-lived as the market had more than fully recovered the loss within a month. Three months following the reactionary decline, the S&P 500 had risen 24 percent.
A November 2015 CNBC report on the reaction of the US stock market to foreign terror attacks found that overseas terror attacks (the category for which there is the largest data) were, at most, irrelevant to stock price moves. One week following an attack, the S&P 500 had increased an average of 0.2 percent—the same average price change for weeks not following terrorist attacks. Strangely, the CNBC report found that in the 12 months following foreign terror attacks the S&P 500 return averaged 14.2 percent, well above its long-term average 1-year return.
On the day President Kennedy was assassinated, the DJIA fell 3 percent. Despite conspiracy theories implicating Cuba, the mafia and the FBI, the stock market fully recovered within a week. By November 1964 the S&P 500 was 25 percent higher.
In the 2 days following the attacks on Pearl Harbor, US stocks dropped 7.6 percent. Except for a few months in 1942, however, US stock prices consistently increased throughout WWII, providing investors who bought following the Japanese attacks a 25 percent annualized return from December 1941 to September 1945.
The economic impact of terrorism is mostly localized and isolated. The most meaningful economic impact of terrorism is the billions of dollars spent on a security apparatus—money that could otherwise be put to productive use.
(Do not be deluded into believing that spending on illusory security theatrics or rebuilding destroyed infrastructure creates economic growth. If so, we could create an economic utopia by dynamiting our bridges and highways. Google “broken window fallacy.”)
Investors who panic at geopolitical events do so at their peril. Hysteria is emotional irrationalism at its finest, usually creating opportunity for the calm thinker.
David Moon is president of Moon Capital Management, a Knoxville-based investment management firm. This article originally appeared in the News Sentinel (Knoxville, TN).