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How Much Impact Does Terrorism Have On The Stock Market

Terrorism do have an impact on the financial markets.

 

This article was first published by Kim Iskyan at Truewealth Publishing

I had flashbacks earlier this week when 14 people were killed in a terrorist attack in the Russian city of St. Petersburg.

I remember waking in the summer of 1999 to the news that an entire apartment building a few metro stops from where I lived in Moscow had been blown up. Another time, just down the street from where I worked downtown – steps from Red Square – a suicide bomber struck in a passageway that I walked through every day. And a few years later, a bomb killed dozens of people at the international arrivals area at one of Russia’s major airports that I had passed through dozens of times.

The personal calculus of terrorism

Each time, the selfish personal calculus flashed through my head: What’s next… and what should I do now? Where is my family? Was anyone I know hurt? How do I get home today?… and how will I change my life because of this event?

For many people, terrorism is a far more central part of life. Friends in Sri Lanka used to talk about the mounted machine guns on the tops of office buildings downtown during the country’s brutal, grinding 30-year civil war. The 9/11 attacks in the U.S. steeped a whole generation of Americans in the calculations of terrorism. And daily life in many parts of the world – including entire countries in the Middle East – is defined by the fear of terrorism.

Thinking about asset prices and stock markets in the context of the senseless loss of innocent human life might seem insensitive. But terrorism is a reality – like earnings or changes in management or the economic cycle – that affects markets. Just because it’s a terrible thing doesn’t mean you should ignore its impact on your portfolio.

Of course, the impact of terrorism varies widely, and over different time periods. There’s the short-term market impact – and the longer-term economic impact (if any) and how that affects markets. And terrorist attacks take place in the context of the broader economic environment… directly attributing the impact of any one event can be difficult.

Usually, the market impact is small

Broadly speaking, the impact of terrorism on stock markets is generally small. Although intra-day volatility – particularly in currencies – can be large, a terrorist attack that dominates the headlines usually has a limited effect on asset prices. The decline in U.S. and global markets after the 9/11 attacks in the U.S. in September 1999 were mostly erased within weeks. In Moscow, terrorist attacks result in little more than a blip. (Since Monday’s attack, the Russian stock market is up close to three percent.)

Sometimes, terrorism can have a significant economic impact, which can carry over into markets. The 9/11 attacks in the U.S. are estimated to have reduced total U.S. economic output by 0.5 percentage points that year. A country that’s heavily dependent on tourism (for example, Egypt and Tunisia, which have experienced serious terrorist attacks in recent years) might see a sharp decline in visitors, as tourists go on holiday to venues that are perceived as safer. Following some of the biggest attacks during Sri Lanka’s civil war, in 1996, tourism fell by 40 percent.

The bigger cost

In the longer term, measures adopted to counter terrorism can have a big knock-on effect. The cost of heightened security measures – in terms of longer lines, time wasted, and more security personnel and surveillance – is incalculable. And the political reverberations – such as tighter immigration controls – of terrorism carry a real economic impact that’s impossible to determine.

And then there’s the danger of the threat of terrorism contributing to underinvestment and becoming a serious drag on long-term economic growth. In the wake of the November 2015 attacks in Paris, the Economist magazine suggested, “If ISIS lives up to its threats of repeated attacks, that might play into the impression that the EU is undermined by social and ethnic divisions; the Eurabia of US media headlines. That would discourage both foreign investment and tourism.”

And terrorism can also have unexpected consequences. One 2013 paper found that the smaller trade partners of a large economy that suffers a terrorist attack experience a bigger stock market decline than the bigger trade partners of the country under attack. (The paper also notes that democratic countries are more vulnerable.)

For nearly all investors, terrorist incidents aren’t a reason to change your asset allocation or your approach to markets (except in extremely exceptional circumstances). And though your first (financial) response to a terror attack might be to check your portfolio, making knee-jerk decisions is almost always the wrong thing to do.  As odd as it sounds, procrastination can be a useful investment strategy.

Truewealth Publishing is an independent investment research firm. Truewealth Publishing have recently launched a new research service focused on finding good investment opportunities at unusual places. If you enjoy their content and would like to find out more about the investment opportunities that they are focusing on, you can check it out here.

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