Market Reactions to Acts of Terrorism
Market Reactions to Acts of Terrorism
News reports have sadly been full of reports of terrorist activities in many countries around the globe in recent times. This week’s shocking attacks on Paris nightspots and a concert venue have made headlines and been the lead stories for newscasts worldwide with their unfathomable severity and civilian casualties.
Many terrorism experts believe that the intent of such actions is not only to instill fear in the populace but also to bring about financial damage to countries the perpetrators view as their enemies as a means of revenge for actions against their members. Governments and citizens alike naturally experience disbelief and a feeling of vulnerability from such actions.
Historically US markets have experienced a short-term decline after such incidents, but the impact has proven to be short-lived and losses are reversed quickly. It’s likely too soon to determine with any level of certainty what the impact of the Paris terrorist attacks will be but if the reaction to date is any indication the market response will be relatively moderate.
Markets outside the US have been somewhat less resilient as noted when past terrorist acts were experienced in Spain, Tunisia, India, and the UK. Some analysts expressed their expectations that markets would decline as a result of the Paris attacks and from fear of further terrorist actions.
Where can Investors Expect to Observe Market Reactions?
It probably comes as no surprise that some of the more significant declines will be in travel market segments including airlines and cruise lines, but also in hotels and other travel-related stocks. Services to European destinations will likely be in decline for the short term, but are expected to recoup to normal levels fairly quickly. Meanwhile low fuel costs that result in reduced operating expenses to air carriers and cruise lines enhance profitability.
One side issue that could conceivably impact travel markets will be the likelihood of increased security and checkpoints at airports and border crossings. Travelers have already wearied from such time-consuming and disruptive processes so expanding them could limit the desire to travel, at least for some length of time.
In contrast to travel-related stocks US futures edged higher Monday in early trading while world markets in general were mixed pending outlook of the Paris impact. Resilience of markets and investors cannot be ignored when evaluating the economic impact from terrorist threats. Even the incredibly tragic attack of 9/11 in the US that reduced that economy’s GDP for the year recovered in a month’s time. In the UK terrorists attacked the London transportation system with suicide bombers in 2005, but those markets recouped in a matter of days.
What to Look for in Market Reaction
Key to reaction of markets not only within the economy where the attacks take place but in other markets is the potential for recurrence or the expectation of further attacks. Continued vigilance to recover civilian confidence is critical to limiting the duration of impact from these horrendous actions.
One example of at least short-term impact is noted in the UK where additional security in popular shopping areas has tended to make consumers wary of potential threats even where no actual intelligence indicates an imminent attack. It’s the duty of countries to protect their citizens but these extra precautions have the side effect of unnerving shoppers, who may wait until time passes before their comfort level returns.
Monitor Market Reaction when Considering Trades
Day traders will need to monitor reactions from these conditions when making buy and sell orders through their online brokers. Although impact may not be severe and recovery swift there could very well be market segments that realize a slightly longer timeframe to fully recoup losses.
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