Terrorism in recent years has become frighteningly common, impacting not only global morale, but also the economy. While the economic repercussions are certainly not the most important ones, anyone relying on market movements to earn their living may be running scared, not only from potential security risks, but from potential economic fallout. Whether we want to admit it or not, these events do have financial repercussions on both the specific country wherein the attack occurred and also the global marketplace, with dozens of industries affected. And while many businesses are left to suffer in silence, it's worth taking a broader look at just how terrorism impacts the economy, both locally and globally.
September 11 – A Case of Firsts
The carnage following September 11 was so severe, so heart-wrenching and so distressing that few could think about little more than the families affected. But in reality, the economic destruction was immense, certainly in the immediate vicinity, but also throughout the world. In the wake of September 11, New York stock exchanges were closed for a week, requiring the Federal Reserve to inject $100 billion in liquidity a day to help avoid a financial crisis. The price of gold skyrocketed from $215.50 to $287 an ounce and the price of oil rose significantly as well while to US dollar plummeted against all of its major trading partners. Following September 11 global stock markets crashed, as painfully as 9.2% in Brazil, 8.5% in Germany and 5.7% on the London Stock Exchange (not to mention a handful of other serious declines).
Insurance companies were devastated by the imposed payouts, and publically-traded companies lost millions not only in payouts, but also in shares. Locally, hundreds of businesses were forced to close, hundreds of thousands of jobs were lost and entire industries (hotels, tourism and aviation, for example) were extremely hard-hit. On the micro level, families had lost their primary wage-earners, creating an entirely new socio-economic challenge moving forward. However, macroeconomists are quick to point out that this picture of economic destruction was short lived. In fact, the markets rallied for six straight months following September 11.
More Recent Times
In March 2004, multiple carefully-timed bombings in a Madri'ds Atocha train station rocked the nation (and the world); it was the worst terrorist attack in the country since 1968. The immediate costs to the country in terms of insurance, compensation, healthcare, infrastructure, tourism, business and other incidentals was high, totaling upwards of 200 million Euro. The long-term economic impact, was relatively small. According to a working paper put forth by the Insituto De Analysis Industrial Y Financiero, the reason for this is simple: terrorism, when understood as a single isolated incident on a country or city, is unlikely to scare investors for the long term. This theory certainly proved true in the case of September 11.
More than a decade later, on January 7, 2015, an attack on French magazine Charlie Hebdo shook the world once again, albeit on a severely lower scale. Following the attack, analysts were amazed to see that the S&P 500 jumped 1.16 percent. The French CAC 40 closed the next day up 3.5 percent and oddly, most of Europe closed up nearly 3 percent as well in the day following the attack. This certainly supported the notion set forward following September 11 that terrorist attacks may actually correlate to a rise in the markets. The question becomes, however, what happens when terrorism is no longer isolated, but becomes painfully more commonplace? How will France's markets (and global markets) react when realizing that the Bataclan bombing was the third act of terrorism in France's borders this year (with the second being the attack on the kosher supermarket HyperCacher only a few short days after the Charlie Hebdo massacre)?
Will the growing fear of Islamic fundamentalism change the course of immigration throughout Europe (and the world)? How will the refugee crisis impact the global economy? Will there be boycotts imposed or sanctions implemented that will affect the countries responsible for this attack? Will these measures impact other countries? There are many things to consider, and no immediately obvious answers. If you're looking to trade the news, however, you may want to look at the bigger picture, in conjunction with the long-term charts following terrorism to conclude that the financial ramifications of terrorism aren't nearly as overwhelming as perhaps they should be (or could be). This may change as world leaders crack down on terrorism – but if the past is any indication, they're likely to forget all about these events before any real response is leveled.