Markets stunned investors bracing themselves for heavy losses in the wake of last week’s terrorist attack that resulted in the death of 21. However, the main benchmark closed over 30 points higher (2,844.25) a day after the attacks. The resilience was indeed remarkable.
But was it a lucky turn of events? The answer is No. Markets typically bounce back following panic-induced selling. Call it the “terrorism trade,” the reflexive bounce back after a dark day is fast becoming a “sure trade”.
Last week’s market reaction was no different, the market ended up mirroring investor action observed in similar events in the past.
Seventeen years ago, following the Kikambala Hotel Bombing, markets rallied 13 points on the day after the attack. From that point to year’s end (some 45 days later), equities rallied 20 percent to close at 1,362.85 points. Similarly, investors were undeterred in the aftermath of the Westgate attacks in September 2013. That week, markets added 28 points.
Examining 25 global terrorist attacks over the last five decades, Charles Schwab Research found that, on average, stocks returned to pre-attack levels in less than three weeks. On most occasions, markets had regained their composure within a week or less. For instance, investors’ reaction to the 9/11 terrorist attacks first saw developed market equities lose 12 percent over a nine-day period but then fully recovered over a 14-day period.
Emerging-market equities lost 15 percent over a similar time period (nine days) but fully recovered soon thereafter. Better yet, investors’ reaction to the 2015 deadly terror attack in Paris was largely muted.
If history is a guide, the fact that the markets quickly shake-off pessimism should not come as a surprise.
Markets appear to be increasingly blasé regarding the economic impact of terrorist events. It seems that investors like to read terrorist-induced declines as buying opportunities, resulting in increasingly brief declines.
It appears that investors have learned to accept that event risk in the form of terrorist attacks is not going to go away. They have learned to live with the risk, realising that it seldom pays to sell in times of panic.
Given the above, in future, investors ought to act with caution during times of uncertainty and volatility and not take any irrational decisions. Investors who act irrationally and liquidate their investments soon after such events often lock in negative returns and relinquish the opportunity to participate in the recovery.
****
On an unrelated issue, I would like to pay homage to one of the greatest investment legends, John Bogle, who passed on last week. Bogle will be remembered for bringing investing to the masses through his creation of the index fund and founding of the low-fee investing firm Vanguard Group. He preached a philosophy of steady investing and avoidance of market timing. This is in contrast to most fund managers who promise investors large rewards only to deliver them nothing.
PAYE Tax Calculator
Note: The results are not exact but very close to the actual.
