Terrorism is ugly, cruel and revolting. When a terrorist event occurs close to home, fear is often added to the emotional mix.
But in the world of investing, the best words to describe terrorism are No Lasting Effect.
The IRA executed well over 100 terrorist attacks in recent decades. Each took place against a background of important economic events like recessions, bull or bear markets, interest rates changes and fresh-breaking economic news. For this reason, we can not measure the precise effect of a specific terrorist attack. There are too many other variables in play that muddy the waters.
Even so, a review of all price swings in the period surrounding each attack leads to a clear-cut conclusion. The effect of IRA terrorism on UK shares is inconsequential.
Think back to one of the first attacks on the UK mainland on March 8 1973 outside Old Bailey. The nation was shocked. Adding to investor concerns was the fact that the UK stock market was in the midst of its worst-ever bear market. Even so, shares fell on the day of the attack by -0.7 per cent and on the following day by -0.6 per cent. Prices then rose the next eight trading days in a row.
The Birmingham pub bombings on the night of November 21, 1974 was, at the time, the worst terrorist attack ever recorded on the UK mainland. Twenty one died and 184 were injured. The UK stock market was still in immersed in its worst-ever bear market. Shares had slipped -2.8 per cent on the two trading days before the bombing. They fell another -4.6 per cent on the two trading days that followed, but returned to their pre-bombing level two trading days later.
Throughout the 1970s to 1990s, letter bombs, political assassinations, pub and rail bombings, mortar attacks on Heathrow and even an attack on household cavalry horses in Hyde Park produced similar non-effects on UK shares.
Some attacks were specifically targeted on the City like the bombing of the Baltic Exchange on April 10, 1992 or the Bishopsgate attack on April 24 1993 which caused £1 billion in damage. As far as the UK stock market was concerned, there was no lasting effect.
Other terrorist activities typically produce similar results. Al Qaeda was blamed for dozens of terrorist attacks throughout the world in recent years. With one exception, the World Trade Centre bombing on September 11, 2001, there was no long-lasting effect.
Recall the car bomb that blew up the US embassy in Nairobi on August 7, 1998, killing 240. America's S&P 500 fell -0.1 per cent on the day of the bombing. The FTSE-All Shares index rose +1.2 per cent.
The Bali bombing on October 12, 2002, killed 202 people. Shares fell in London on the following trading day by -0.5 per cent and then bounced back one day later by a whopping +4.75 per cent. Wall Street gained on both days.
Closer to home, 191 died and 1,400 were injured in a series of Madrid train bombings on March 11, 2004. The FTSE-all Shares index fell -2.2 per cent on the day of the bombing and regained all of those losses in the next four trading days.
The story is typically the same, no matter if we are talking about a Pan Am flight destroyed over Lockerbie or the siege in a Beslan school by Chechen terrorists.
Recall the Oklahoma City bombing on April 19, 1995 that shocked America. The death toll reached 168 with another 800 injured. Three hundred buildings in the surrounding area were damaged or destroyed. The S&P 500 fell -0.1 per cent on the day of the bombing. The FTSE-All Shares fell -0.6 per cent and then rose the next five trading days.
Throughout the last three decades, there were hundreds of incidents throughout the world that had the same non-effect on UK investments. It leads investors to the obvious conclusion: any event that produces a knee jerk sell-off should be viewed as a buying opportunity.
Two recent terrorist attacks in London on July 7 and 21 followed the norm.
The first bombing triggered a big sell-off that ran its course in less than three hours. A second failed attempt on July 21 had virtually no measurable effect on the UK stock market.
Throughout recent history, there was only one exception to the rule that terrorism has no meaningful affect on share prices. All major stock markets fell sharply after New York's World Trade Centre and America's military nerve centre at the Pentagon were bombed in September 2001. The UK stock market fell 12 per cent in nine days. But even then, prices recovered to their pre-bombing level 13 trading days later.
What made this attack different as far as the stock market was concerned?
First and foremost was the enormity of the attack. Initial casualty estimates were in the area of 10,000. The New York stock exchange was forced to close for the rest of the week. Parts of the underground subway system were indefinitely put out of action. In the midst of fearful uncertainty, investors had to contend with the likelihood of US military action, the enormous cost of rebuilding lower Manhattan and possible knock-on effects on national consumer confidence and the broad US economy. It is also worth recalling that Wall Street was in the midst of a painful bear market.
The fact that shares began to regain their composure after nine trading days speaks volumes about the long-term effect of terrorism. But the trading patterns following 9-11 also suggests some investment rules of thumb worth reflecting upon. Terrorism, no matter how ugly or frightening in human terms, has little effect on shares. It is uncertainty about broader economic issue that counts. The key question: does the event damage the broad economy?
This broad economic dimension helps to explain why the Bishopsgate bombing (triggering £1 billion in damage) or the Oklahoma City bombing (America's then worst) had no lasting effect on investors. It also helps to explain why stock markets on both sides of the Atlantic recovered so quickly in September 2001 once the broader economic effect of the bombing was understood.
Source for all daily price changes: Thompson Financial Datastream