How Terrorism Can Affect The Markets

Terrorist attacks have a direct, immediate and visible impact on economic markets: After the terrorist attacks of September 11, 2001, the Dow Jones, after being closed a week to allow the market to settle, still dropped nearly a thousand points the first morning that it opened, and did not recover until nearly a month later.

It is clear what effects the markets when terrorism occurs. First, attacks cause broad doubt and negative opinions concerning the world, which is bad news for all markets. It creates an automatic emotional reaction that is unhealthy for business activity. Second, terrorist attacks tend to target key assets or services. Power companies, transportation methods, key centers of business or population are the most common targets, and these are also the targets with the strongest ties to business and economic flow.

The Ongoing Dangers of Terrorism and the Markets

This negative response by consumers and investors is far from a thing of the past. Indeed, some of the most recent terrorist attacks have also had an immediate impact on markets and buyer perception.

For example, following the shootings at Parisian magazine Charlie Hebdo in early 2015, analysts feared a re-examination of Parisian luxury goods from around the world. It was assumed that the wealthy in other countries, such as China, who visited Paris to shop for specific items such as designer clothes and the latest fashion accessories, would look at the shooting as a reason to skip the trip to Paris and thus reduce luxury purchases of both goods and services such as flights and hotel stays.

It is a problem when such attacks can immediately be heard around the world. No one wants to be in a location where another attack may occur, and locations targeted by terrorists gain a stigma that keeps consumers away, at least for a period of time.

The Good News: Limited Effects

On the positive side, the effects of terrorist attacks appear to be largely temporary. Sometimes, they can even be beneficial for certain markets. “Survival goods” often see an uptick in sales following an attack. Consumers may also find new solidarity with local brands: Following the Paris shootings, major Parisian fashion designers expressed support for the victims, and the French market actually saw growth in the following days, with companies like Kering and L’Oreal showing positive gains.

Losses still occur, though. In 2013 following the terrorist attack at the Boston Marathon. U.S. stocks dropped 2.1%, the worst fall in a year, following the bombing. Investors proved especially sensitive to negative news during this time period, and the losses were exacerbated by poor news on the Chinese economy. However, a look at historical trends shows that on average, it takes around 4 weeks for a stock market to recover from terrorist attacks, a welcome elasticity in financial markets that diminishes long-term effects dramatically.