Terrorism and the Stock market

On the 13th of November 2015 France was subject to a set of coordinated attacks in its capital city Paris. Two weeks on, this article looks at how the markets reacted to this news; including how they’ve reacted to previous terrorist events.

Why might a terrorist attack affect the markets?
Throughout history there is one resounding economical lesson to be learnt: wars destroy economies. They are expensive, destroy production structures and lead to the loss of human capital. Terrorism has an innate connection to war.

  • Damage. In the 9/11 attacks one of the financial hubs of the world was badly damaged, alongside the death of some of the brightest minds in that industry.
  • Consumer spending. Terrorism in its nature causes fear, this prevents people travelling, retail shopping or even leaving the house. If people stop spending, earnings for companies fall.
  • Trade barriers. If linked to a certain country an attack may result in sanctioning, preventing exports and imports with that country. This reduces potential growth and harms companies with exposure.
  • Reaction. A country’s reaction to an attack will affect the markets. Governments might divert more resources towards fighting terrorism (e.g. defense spending), which could be used elsewhere in the economy. Furthermore solid evidence of further conflict will cause unease in market participants.
  • Emotion. Traders may get caught up in the emotion of the attacks, selling shares over uncertainty. A rational trader will recognise that terrorist attacks have not caused structural issues on the same scale as a war.

Evidence
Collating information from Yahoo!Finance I’ve plotted the movements of the CAC40, S&P500 and FTSE100 two weeks following the November Paris Attacks and September Twin Tower Attack. Both Figures show the base levels of each stock market, with 100 being the day prior to the attacks and a 1 point difference representing a 1% change.

twoweeks911

As we can see in the case of NYC, the FTSE100 and CAC40 initially reacted negatively to the NYC attacks. On the day the stocks fell around 7% on average. The S&P500 remained flat, as trading was cancelled for the week. Following the grace period stocks in America fell around 5% before regaining their losses towards the end of the two week period. What we can see from this graph is an initial negative reaction, consistent with the market digesting the information of an attack and sorting through the potentially negative market effects mentioned at the beginning of this article. However after a few weeks the market regains its upwards cause, suggesting participants do not expect much lasting structural damage or affects on company earnings.

twoweeksparis

Following the Paris attacks the markets were more muted. The CAC40 fell slightly for three days, before recovering on the 16th. The S&P500 and FTSE100 even gained ground following the attacks. This reaction has been attributed to increasing knowledge of market performance following terrorism. Previous incidents show that markets tend to recover quickly, such as 9/11, therefore reducing the initial negative effects this time round. Furthermore the attacks happened on a Friday evening, giving the markets the weekend to react rationally, rather than a maybe more panicked sell-off occurring.

These graphs are interesting depictions of the stock market movement, but ironically they don’t show the full picture. It is very likely that certain corporations suffered more than others. The two weeks following 9/11 airplane companies, such as Boeing, fell -9.47%. This is along side financial service companies, such as Bank Of America, falling -7.47%. However other companies rallied. Lockheed Martin, currently the largest defense company in America, gained +9.6%.

At the end of the day it is not about winners or losers. Whilst this article hopefully provided an interesting insight into stock market movements, lives were lost and they are far more valuable.

 

@ProdigyMarkets

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