How do Markets React to Terror?
– by Sarah Hannibal
As of November 30, 2015 there have been over 300 terror attacks this year. Most of these attacks have been in in places that our US news media does highlight and in places where terror attacks have been all too common (i.e. Afghanistan, Iraq, Somalia, and Pakistan). The recent attacks in Paris put westerners on heightened alert. People are skittish, not only about travelling but also about the markets.
It is very sad that the world we live has so many acts of deliberate violence and sad that they are becoming so common place. After Paris, we anticipated the markets would be down. We were surprised they did not affect investor sentiment at all and wanted to take a minute to reflect on market reactions to terror incidents.
Investors’ knee-jerk reaction is to sell risky assets until they can measure the resulting fallout. If the actions are not deemed to add weakness in the global economy, the decline will be short lived. As you can see from this sample of recent events, both the market decline and the recovery tend to be quick. Since the Paris attacks happened on a Friday evening, investors were able to assess the situation over the weekend while markets were closed. There was not even a pullback in US markets.
For client long-term investment plans, we avoid knee-jerk reactions and focus on long-term goals and objectives. We control what we can (diversification, taxes, fees) and take risks that are measured. Market timing has no place in a long term plan and accurately timing the bottom and recovery of market shocks is a guessing game.In looking at previous “market shocks” since 1941 [i], the average one-day loss was 2.1%. The average total loss was 6.2%, which occurred 13 days later. The median recovery was 25 days.
[i] Includes terrorist attacks in the US and Europe as well as Pearl Harbor, Kennedy assassination, 1987 Market Crash, Lehman bankruptcy, 2010 “flash crash” and others (USA Today, November 16, 2015)
Table Source: USA Today & Yahoo Finance