On Friday, the UK government raised its terror threat from "substantial" to "severe" as Home Secretary Theresa May warned of jihadists' threats from Iraq and Syria. Global stock markets sold off initially on the news, but recovered later in the day.
As investors and traders, we should be focusing on fundamentals. Aside from the tragedy of injury and loss of lives, market participants should be asking what impact a terrorist attack would have on the growth outlook and interest rates. In most cases, the answer is "not very much."
Consider these three examples of how the market reacted to past terrorist events. Here is the market reaction to the Boston Marathon bombing. Blink and you would have missed the disruption.
Here is the market reaction to the Madrid train bombings of 2004. In this case, the story was a little complicated. Wikipedia explains the sequence of events this way:
The bombings occurred three days before general elections in which incumbent José María Aznar's PP was defeated. Immediately after the bombing, leaders of the PP claimed evidence indicating the Basque separatist organization, ETA (Euskadi Ta Askatasuna) was responsible for the bombings, while Islamist responsibility would have had the opposite effect as it would have been seen as a consequence of the PP government taking Spain into the Iraq War, a policy extremely unpopular with Spaniards.
Nationwide demonstrations and protests followed the attacks. The predominant view among political analysts is that the Aznar administration lost the general elections as a result of the handling and representation of the terrorist attacks, rather than because of the bombings per se.
In this case, the IBEX charts show that the markets were reacting to the news of the bombing and the election, which occurred on the weekend three days later:
The moral of the story: Don't just react to headlines, focus on fundamentals.
Disclosure: Cam Hui is a portfolio manager at Qwest Investment Fund Management Ltd. ("Qwest"). This article is prepared by Mr. Hui as an outside business activity. As such, Qwest does not review or approve materials presented herein. The opinions and any recommendations expressed in this blog are those of the author and do not reflect the opinions or recommendations of Qwest.
None of the information or opinions expressed in this blog constitutes a solicitation for the purchase or sale of any security or other instrument. Nothing in this article constitutes investment advice and any recommendations that may be contained herein have not been based upon a consideration of the investment objectives, financial situation or particular needs of any specific recipient. Any purchase or sale activity in any securities or other instrument should be based upon your own analysis and conclusions. Past performance is not indicative of future results. Either Qwest or Mr. Hui may hold or control long or short positions in the securities or instruments mentioned.