The world is dangerous—a fact Americans were brutally reminded of on September 11, 2001. There are few times when you can honestly say, “It’s different this time,” but for Americans, something fundamental changed that day. We know thugs can reach us if they really want to.
The good news is, while thugs can be deadly, they haven’t taken down our vibrant economy or capital markets—and likely never will. How do you know? It would be hard for any future attack to match the pure shock value of September 11. Right now, most Americans would agree it’s not a matter of if we’re hit again, but when, and what it looks like. So to know the impact of the next major terrorist attack on US soil (or on our friends or interests abroad), think globally and check history.

Markets Globally Are Resilient

Stocks did fall big following the September 11, 2001, attacks. It’s not surprising—considering the scale and the utter first-time-surprise effect of that attack. The exchanges closed for days, and when they reopened on September 17, the S&P 500 fell -4.9 percent and kept falling the entire next week.1 US stocks were down -11.6 percent by September 21.2 But then they reversed course sharply. That’s about the size of a small but normal correction within a bull market. By October 11, stocks were back at September 10 levels, and they largely traded above there for months afterward.3 But this wasn’t a correction within a bull market. Those attacks came two-thirds of the way down through a huge bear market that was already long underway—and it didn’t end, arguably, until March 2003. But the back of that bear market wasn’t driven by the terror attacks.
How can we know? Look at later, similar attacks. On March 11, 2004, terrorist goons struck the Madrid train system, bombing it into disability. Spanish stocks fell several percent in the days following, but gained over 29 percent for the year.4 Global stocks also fell that day, but hit pre-attack levels 20 days later and finished the year higher.5 Then the London Underground was bombed on July 7, 2005. Stocks barely flinched. By the end of the next trading day, the UK’s FTSE 100 was higher and would finish the year up 21 percent. 6 Global stocks were up 9.5 percent in 2005.7
Another way to think of all these attacks is while there might be a short-lived reaction, even major terror attacks can’t derail stocks from their overall near-term trend. In 2001, stocks were in a bear market that continued after the attacks, and in 2004 and 2005, terror bombings couldn’t stop a bull market.
How can markets be so dismissive of terrorism, when it’s such a new, terrible, and very real threat? In many ways it’s because we fear it, think intuitively, and fail to think counterintuitively. Markets are inherently counterintuitive. Fact is, sadly, terrorism is tragic, but not a very new threat nor very significant in the grand scheme of the global economy.

History Shows Stocks Don’t Scare

The September 11 attack wasn’t the first on US interests or even on US soil. Previously, we’d had the USS Cole bombing in 2000, the attack on the military barracks in the Khobar Towers in Saudi Arabia in 1996, and the first Twin Towers attack in 1993—all by Al Qaeda. But there was also Pan Am flight 103, bombed over Lockerbie, Scotland, in 1988, and the attack on the US Marines’ barracks in Lebanon in 1983. The Achille Lauro in 1985. Israel has dealt with a daily onslaught of terrorism for decades. The Irish Republican Army menaced Britain for nearly a century—all while their markets thrived. World War I was started by a terrorist act. The US Marine Corps protected US shipping lines from the North African Barbary pirates in the very early nineteenth century (hence the line from the Marines’ Hymn “to the shores of Tripoli”). Simply, the power it has to move markets has been, thus far, fleeting. Yes, September 11 was bigger, but still fleeting in terms of market impact.
Figure 50.1 shows market reactions following some major, more recent terror attacks in the US and globally. On average, stocks are flat—slightly positive—the day after and positive in subsequent days. That shouldn’t surprise, since stocks rise more than fall. Simply, the market isn’t much terrorized by terror.
Figure 50.1 Have No Fear—The Market Doesn’t
Source: Global Financial Data, Inc., S&P 500 price return.
Terrorism is nothing new, but technological advances have made it deadlier. So what if some major new attack—a miscreant with a suitcase nuke, for example—takes out an entire city? How can you use history to check that?
It’s imperfect, but consider: Much of New Orleans was destroyed by Hurricane Katrina in 2005. The day the hurricane hit, August 29, 2005, the S&P 500 rose 0.6 percent and world stocks were flat.8 And despite the businesses lost and the work stoppage, GDP was positive in Q4 2005, as were US and world stocks.9
Why did stocks shrug it off? I’m not sure. But surely the world market knew this tragedy, while ugly and brutal, wasn’t big compared to global GDP since all of Louisiana’s GDP was only 0.9 percent of US GDP and about 0.25 percent of global GDP. Since GDP normally might grow about 5 percent in a normal year (nominal—with a few percent inflation), this is too small at its worst to stop global growth or the stock market.
And while New Orleans wasn’t a major economic center, San Francisco definitely was in the early twentieth century. That city was leveled, entirely, by the April 18, 1906, earthquake and fire. Of a population of about 410,000, as many as 300,000 were homeless and the business and financial districts were flattened completely. San Franciscans, including my grandfather, his fiancée (my grandmother—they had to put off their wedding a year because of the disaster), and their families lived in tent camps in Golden Gate Park and other green spaces around town. Again, an ugly and brutal tragedy—but the impact on stocks was negligible. An entire city destroyed and basically out of commission until rebuilt—but stocks dropped just a bit in April, were higher in May and June, and had an overall fine year.10 The big drop was the following year—but that had everything to do with the 1907 bank panic, and nothing to do with the loss of San Francisco’s productivity.
Terrorism’s human impact can be massive. That’s why terrorists choose those particular tactics. They are cowards who hit civilians. But fortunately, so far, their market impact has been relatively minimal at worst—fleeting at best. Capitalism is too strong a force to be kept back by cowardly thugs.
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