Being Street Smart July 09/05
by Sy Harding
July 09/05
TERRORISM AND THE STOCK MARKET!
Shock and aw, as in ‘aw not again’. Deaths and injuries of the innocent from terrorist attacks, in London this time. And just as U.S. investors were becoming complacent and convinced that terrorists had packed up and moved to Iraq.
The U.S. stock market’s initial reaction to the news prior to the market’s open on Thursday was shock, and a plunge in Dow and S&P 500 futures of more than 2%. But as ongoing news began to indicate the attacks, although serious, were not as damaging as originally feared, the futures began to recover, and the market opened down, but by less than one percent.
That all seemed reasonable, a bit of panic before all the news was in, and then some calming down as more information became available.
But then, in what seemed to be another example of a ‘conundrum’, which has become the favored description of this market’s positive or negative reactions to conditions so far this year, the market began to rally, not only back to where it was before the attacks, but closed up for the day. That positive action took place even though crude oil prices were spiking up to yet another new record high, and the consensus opinion had become that the stock market would be hostage to oil prices from here on (would decline if oil prices rose, and would rally if oil prices fell). Also, mid-day on Thursday it was reported that U.S. crude oil inventories had declined the previous week, even as hurricane Dennis was headed for the Gulf of Mexico and its oil drilling platforms, refineries, and unloading facilities for foreign oil tankers.
None of this would seem to be positive for the market. Yet not only did it rally to close up for the day on Thursday, but followed through with further positive action on Friday in spite of Friday’s weaker than forecast monthly jobs report for June.
The operative explanation seemed to be ‘relief’. The London attacks had not been as serious as they could have been, and did not result in financial markets closing in London, as had happened in New York after the 911 attacks. But then, unlike the 911 attacks in the U.S., the London attacks were not aimed at the financial district, but at the subway system, which was closed down.
Also, said Wall Street, remember that the 911 attacks in the U.S. were followed by a substantial six-month stock market rally. Sorry, but that does not compute either.
The rally after the 911 attacks did not take place because the terrorist attacks themselves made stocks more valuable. On the contrary they created significant economic problems. The stock market rally took place after Washington, nervous because the economy was already mired in the 2001 recession, and the stock market was in the midst of the severe 2000-2002 bear market, responded to the attacks with massive economic stimulus efforts. Those efforts included immediate heavy government spending to create ‘homeland security’, lower interest rates, and appeals for consumers to get out and spend the economy out of its rut to show the terrorists America would not be intimidated. It was that economic stimulus, not the terrorist attack, that encouraged the stock market to believe the economy would be in great shape six months out. (When it wasn’t, the rally ended and the market plunged to a significantly lower bear market low in the summer of 2002).
Wall Street is also comparing the London attacks and what they might mean for the stock market, to the fact that historically after shocking events, like political assassinations or the beginning of wars, the stock market usually responds to the downside only briefly, and then recovers from its dismay and launches into a rally.
To begin with, as sad as it was, the brief terrorist attack in London did not constitute an event of similar magnitude.
Further, in previous such situations, it wasn’t the political assassinations or wars that made Wall Street happy, but the economic situations that followed.
For instance, when President Kennedy was assassinated, the stock market plunged, but then corporate America correctly assumed his replacement, Lyndon Johnson, would be less antagonistic toward business, while he was also expected to step up the war efforts in Vietnam.
For their part, wars always result in immediate massive amounts of government spending, on defense and military equipment, increases in military forces and their transportation, and the like. So, after its initial dismay that another war is underway, the stock market usually begins to anticipate what all that government spending is going to do for the economy, employment, and corporate earnings six months out, and is usually able to rally.
But there will be no such economic stimulus from Thursday’s terrorist attacks in London.
Yes, we can be relieved that they were not more serious, and so did not provide a reason for the market to decline to any degree.
But neither can they be taken as a positive from which the economy or stock market will benefit.
The stock market will just have to go back to dealing with its normal concerns, whether positive or negative, and there the situation is a bit more complicated and murky.
Sy Harding is president of Asset Management Research Corp., publisher
of The Street Smart Report Online at
www.streetsmartreport.com and author of 1999’s Riding The Bear
– How To Prosper In the Coming Bear Market.
