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[TTHQ Staff]

BEING STREET SMART
___________________

Sy Harding

TERRORISM AND THE STOCK MARKET! July 8, 2005.

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
significantly 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., DeLand, FL,
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.