Terror and markets: Sell-offs tend to be short-lived
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Analysts expect French stocks to drop when markets open Monday because past attacks in Tunisia, Spain and the U.K. contributed to financial declines. Video provided by Newsy Newslook
The deadly terror attacks in Paris are likely to strike financial markets, too, when trading resumes Monday. But the initial losses expected in risk assets like stocks and the shift into safer holdings like U.S. government bonds and cash are likely to be short-lived, history says.
Investors' knee-jerk reaction to terror attacks and other “shocks” is to sell so-called risky assets until they have a chance to measure the resulting economic fallout, according to data compiled by Sam Stovall, U.S. equity strategist at S&P Capital IQ. The good news is the losses tend to be recouped relatively swiftly as Wall Street typically concludes that both the domestic and global economy won't be derailed by acts of terror.
Terrorism, to a certain degree, is designed in part to harm economic activity, by attempting to scare people and keep them from going about their normal routines, such as going out to restaurants, shopping at the mall or boarding a plane for vacation.
Perhaps the best example of the market's initial plunge and eventual recovery was the 9/11 terror attacks in the U.S., according to S&P Capital IQ data. The Standard & Poor's 500 stock index fell 4.9% on the first day of trading after the market was shuttered for four days. The total stock market loss following 9/11 was 11.6% — which adds up to a "correction" – when the market bottomed 11 calendar days later. However, U.S. stocks then rebounded and recouped all its losses within 31 days.
Overall, the median one-day loss (half are bigger, half are smaller) for the S&P 500 was 2.1% following terror attacks in the U.S. and Europe, as well as other market shocks dating back to the 1941 attack on Pearl Harbor. These shocks include market-negative events such as the assassination of President John F. Kennedy in November 1963, the 1987 stock market crash, the Lehman Bros. bankruptcy in the fall of 2008 and the 2010 "Flash Crash."
The total median loss following all of these shocks was a drop of 6.2%, with the market low occurring 13 days later, according to Stovall's data. The median recovery was 25 calendar days.
The Paris attacks are likely to give markets another short-term scare, as it comes at a time when Wall Street is already dealing with a number of other headwinds, such as coming interest rate hikes from the Federal Reserve, Stovall told USA TODAY.
"It may add some velocity to the current slide in global equity prices," Stovall said. "Investors are already worried about the Fed raising rates and possibly tipping the U.S. into a recession. Now you can add a negative reaction to the terrorist actions in Paris."
But, he added, "Because I don't see these terrorist actions adding to weakness in the global economy, the share price will likely be short-lived."
Back on April 15, 2013, U.S. stocks fell 2.3% on the day of the Boston Marathon bombing and hit a low of -3.0% three days later, before fully recovering its losses 15 days after the attack.
Officials in Paris have said the stock market in France will open Monday, according to Bloomberg.
The scope and scale of the Paris attacks were the first of that nature in Europe in more than a decade. The S&P 500 suffered a one-day loss of 0.8% following the London subway bombing in July 2005 and fully recovered four days later. Similarly, U.S. stocks fell 1.5% in the first day of trade after the Madrid bombing in March 2004 on its way to a 2.9% total decline in a 14-day span. Again, the S&P 500 fully recovered 20 calendar days later, according to S&P Capital IQ data.
The market reaction this time, of course, is likely to be more acute in Europe, as those markets are at the epicenter of the current terror attacks.
So what type of reaction can investors expect from their investments?
Stovall says gold and the U.S. dollar will strengthen, "due to a flight to safety." U.S. government bonds should also see price appreciation due to the safe-haven trade.
The stock market strategist also sees the euro weakening. Oil and energy stocks might also firm, Stovall adds, as the terrorist actions "re-introduce supply uncertainty into the energy equation." Defense stocks might get a pop, as airlines sag, he predicted.
Investors should also expect turbulence in sectors such as insurance and travel and leisure, as well as some brick-and-mortar retail stocks, which are already under pressure due to slow sales and lousy holiday outlooks.
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