This terrorist attack comes only four and a half months after a massacre in the capital of France. A death toll of about 130 with hundreds more injured was the first sign of danger from ISIS after the Charlie Hebdo attacks. The response from the authorities and the population were aimed at ensuring the safety and moral of the nation despite the lingering danger. The three teams of terrorists in Paris were also claimed by the Islamic State soon after the attacks on November the 13th.
The brutality of both of these attacks is used as a long-term psychological weapon which attacks the safety and security of everyday life by instilling fear and uncertainty. The attackers are not aiming to kill as many people as they can. Instead, they plan explosions in open, public places so that that country's population will feel unprotected and terrorized. If the Islamic State can scare innocent civilians without relentlessly attacking them, they have augmented their effect and taken a step towards achieving their goal of intimidation.
The economic condition of a country is no less a target. In fact, if a terrorist can crimp the financial well-being of a nation, it can add uncertainty and instability to a social and political setting. One of the best barometers of psychological effect during a terrorist attack is the movement of the stock market during the event. Because large amounts of emotion accompany a tragedy such as what occurred in Paris and Brussels, one can observe the spillover effect where individuals let significant amounts of emotion affect decisions or thoughts that may not be related to the initial feeling. In addition to a flood of emotions, an unexpected crisis can increase the perceived uncertainty of an investment. The fresh memory of a terrorist event can cause cautious behavior and a reevaluation of risks that might not have ever occurred. In the United States, there was a large political backlash against Syrian refugees after the Paris attacks in response to an evaluation of the risks and uncertainty of allowing these immigrants into the country.
To assess the effect of terrorist attacks on the financial setting of a country, the local (where the attack took place) stock market and the global markets will be analyzed. A comparison of the trend immediately before the attack will allow the effect of the tragedy to be singled out. The analysis will look at three periods over the past 28 years. The events selected are all located in either Europe or the United States because attacks in these locations have a larger emotional effect than the countless that occur in nations deemed "high-risk," for that reason, are more expected and have a smaller emotional effect.
The Pan Am 103 crash in 1988 is the first event to be analyzed. About 240 passengers died as the plane crashed near London, England after an explosion downed the plane. Because most of the casualties were American, the S&P 500 will be used to assess losses. On the day of the event, the major index stayed mostly flat with no deviation from the trend that had developed over the past month. Investor sentiment around airline stocks was the most affected that day with two major equities associated with the airline industry falling on December 21st, 1988. The Boeing drop appears to match the trend that had been developing, but the losses established a new bottom for the two months shown and could represent some emotional trading from the attack. Similarly, Southwest Airlines saw a brief drop in their stock that day, interrupting a clear bullish trend that was developing.
Next is the Oklahoma City bombing in 1995 which targeted a federal building in the United States.The bomber acted alone and was quickly executed for the terrorist attack. The effect on equities was not very strong as the attacker's intentions were most likely not to intimidate and terrorize. Even so, on the day of the bombing, the S&P 500 traded lower all day with an intraday low significantly lower than the settlement price. This could represent an emotional spike but may actually reflect the pattern created by the losses earlier in the week. Similarly, the next week's sentiment recovered to resume the bullish uptrend.
Although the bombings of U.S.embassies in 1998 were events that occurred outside of the country, the financial implications were real at home. Over 200 people were killed in two different African nations due to simultaneous car bombs on August 7th. On that day, stocks fell from a two-day gain earlier that week. Once again, the intraday trend shows a large gap between the low and the high which hints at heightened volatility due to the terrorist attacks. It's unclear, though, whether the losses were due to a trend of volatility that already existed before the bombings. The MSCI Emerging Markets Index (black line) also fails to present any interesting deviations. It is possible that leftover emotions from the event caused the market to fall under uncertainty in the next month. Nevertheless, it appears that the location of the bombing diluted the psychological effect it had on those it targeted.
There is no stronger evidence of the psychological power of terrorist attacks on financial systems than the attacks on the World Trade Center on September 11th, 2001. By taking control of three planes, al-Qaeda operatives were able to destroy the two largest buildings in New York City and kill over 3000 people in the process. It was a truly tragic day for the nation, and the markets weren't even open to show it. Due to panic and the potential for an enormous sell-off, the New York Stock Exchange closed on the 11th and didn't reopen until the 17th of September. Then, the sell-off began. Over the next five sessions, uncertainty and negative emotion extended a bearish trend that had begun in August. The NYSE Arca Airline Index fared worse losing almost half of its price in the same period. Despite the fact that increased security and counter-terrorism tactics would be installed immediately, a bearish trend in airline stocks set in with the attacks fresh on investors mind. The S&P 500, on the other hand, makes a moderate recovery showing the resilience of equities outside of the airline industry.
These next two attacks occurred within a year and a half of each other over the years 2004 and 2005. On March 11th, 2014, multiple train bombings in Madrid killed dozens of innocent civilians and dealt a major blow to the transportation infrastructure. On July 7th, bombings interrupted Long transportation systems with explosions on the metro and a double decker bus. Both attacks elicited bearish trading that seemed to deviate from the local trend. The Madrid attacks caused a more sustained loss that eventually turned to a bullish trend by the end of the year. The effects of the London attacks were very brief but strong. The spike downwards looks out of place in the uptrend that had developed over the past two months. However, the MSCI Transportation Europe Index did not deviate from the major market indexes. The psychological effect of both events was broad-based, quick, and temporary.
The next five terrorist attacks come in a span of a year and a half again with two in the United States and three in Europe. All but one were a result of Islamic State fueled rhetoric and ideas. The first attack in Paris had little effect on the stock market in Europe or the United States. The Charlie Hebdo bombing was more centered around a political argument and appeared to have a specific target. For this reason, the economic effects seem to be negligible, although, uncertainty would start building. The next three attacks occurred in less than a month with casualties in both the United States and Europe. The Paris attacks alone lead to a significant loss from the S&P 500 and the STOXX 600. Both recovered until two more shootings in the United States caused a tense market to plunge downward. On the day of the San Bernardino attacks, equities sold off and began a bearish trend that led into the new year. There's no denying that the weak global economic condition was the main cause of the plunge moving into 2016, but security concerns that smelled of fresh terrorist attacks the month before only added uncertainty and negative sentiment on an already weak market. The Belgium attacks come when markets are starting to make a comeback, distancing themselves from a troubling 2015. The bombings this year will only remind investors of the risks that still exist even if equities in Europe and the United States stayed afloat.
The analysis in this article is just a start of a larger investigation that could be done concerning the effects of terrorist attacks on the stock market. In conclusion, most equities are hurt, even if only slightly, by the negative emotion that comes from an attack. Depending on the trend that had developed, a brief loss could be reversed the next day or send push a bearish build-up through the floor. There was a clear correlation between terrorist attacks using planes and the performance of airline stocks that day. While that supports evidence that sell-offs occur in the industry most affected, the performance of transportation indexes during the Madrid and London bombings says otherwise. If there's one thing to take from this short little study as an investor it is that uncertainty and emotion already existing in a financial system can lead to sudden sell-offs if exasperated by an unexpected brutal event like a terrorist attack.