Capital Markets Defy Terrorists

by: Alex Trias December 02, 2008 | about stocks: EFA / IFN / INP / SPY    

Alex Trias

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Some argue there is no way to win a “war on terrorism” because the enemy is a tactic rather than a targetable entity. That’s wrong. The reason why is that you win a war simply by denying the enemy its objective. This matters because the core objective of terrorism is to trigger societal reactions that are based on fear – reactions such as military or political withdrawals and reprisals, or economic retrenchment. Accordingly, the world’s nations will win their war against terrorism when terrorism simply fails to engender fear driven reactions.

So how far along are we? Looking at the aftermath of last week’s attacks on the city and people of Mumbai, it is clear that the world is farther along the path of winning the war against terrorism than most of us realize.

When the United States stock markets first re-opened following September 11th, 2001, various exchange traded funds (“ETFs”) that track the Dow Jones Industrial Average (such as DIA) or the S&P 500 (such as SPY) plunged well over 15% within days. These losses came on the heels of comparable losses in various ETFs that track international developed markets (including iShares MSCI EAFE Index Fund (EFA)). And the price of each of these ETFs suffered similar losses following the terror attacks in Madrid in March of 2004. Thus far, the capital markets' reaction to terrorism has been a predictable fear-driven response.

But on Friday, as news of the attacks in Mumbai fed across the wires and the U.S. markets opened for business, the Dow Jones managed to close the day higher. EFA closed Friday down a fraction. Counter-intuitively, the India Fund (IFN) actually managed to close up a fraction of a percent, whereas the Ipath India ETN (INP), closed down only about a percent. It will not go unobserved that the global capital markets are about as fragile today as they ever have been, so it shouldn’t take much to knock every stock market on the planet down 10% in a day. Yet, in this bleak market context, one of the most brazen terrorist attacks in recent history doesn’t even cause the global capital markets to so much as hiccup?

This is important. You can ascribe this non-reaction to several causes if you like. Perhaps it’s investor apathy at work. Or perhaps the markets are now so information-efficient that geopolitical risks are fully priced in. Or maybe we are in the early stages of a global bull market, which characteristically climbs a wall of worry and gloom. Whatever the reason, the end result is the same: it now appears that the ability of terrorists to trigger a fear-crazed stampede in the capital markets has been severely degraded.

It should go without saying that the price of an ETF doesn’t matter much in the context of the brutal loss of life and property Mumbai suffered last week. But what does matter is that we are on our way towards rendering these sorts of atrocities fruitless and, ultimately, pointless. The capital markets have denied terrorists their primary objective and have therefore delivered one small, but important, defeat to any group or government that sanctions or supports terrorists or terrorist tactics.

Disclosure: The author owns positions in SPY and EFA.

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This article has 7 comments:

  •  
    Dec 02 07:37 AM
    You are making a mistake in believing that news makes or breaks a market. Run some historical check, and you will realise that if you show the charts without the time stamp to any other technical analyst, and ask if he can point out the most probable time a bad news hit the market, he will fail.

    Because markets are dominated by crowd behaviour and crowd behaviour is essentially emotion driven and not logic driven, thus expecting it to rationally analyse the situation while a news hits the market is irrational in itself.
    We are forgetting, markets are not efficient.

    A few words delving deeper in this arena is given here:

    jumpup.wordpress.com/2.../
    Reply | Link to Comment
  •  
    Dec 02 09:18 AM
    If I understand what you're saying, it isn't information that moves markets, it's market participants' collective reaction to information that does. That's precisely the point of this article.

    Where we may differ is your view that attempting to ascribe a market reaction to one bit of information is irrational. Generally, I agree. Trading rules determine how the markets move in the short run, and over the long run, it's all about supply and demand for capital assets. News don't got nothing to do with it. But there's "news" and then there's history-making events. Historic events certainly move markets - as you point, fear matters when it comes to asset pricing, and historic events often produce plenty of it.

    I'll check out the link you included.

    Thanks for your comment.

    On Dec 02 07:37 AM Soham Das wrote:

    > You are making a mistake in believing that news makes or breaks a
    > market. Run some historical check, and you will realise that if you
    > show the charts without the time stamp to any other technical analyst,
    > and ask if he can point out the most probable time a bad news hit
    > the market, he will fail.
    >
    > Because markets are dominated by crowd behaviour and crowd behaviour
    > is essentially emotion driven and not logic driven, thus expecting
    > it to rationally analyse the situation while a news hits the market
    > is irrational in itself.
    > We are forgetting, markets are not efficient.
    >
    > A few words delving deeper in this arena is given here:
    >
    > jumpup.wordpress.com/2.../
    Reply | Link to Comment
  •  
    Dec 02 10:06 AM
    Dear soham,
    Crowd behaviour is emotion driven and not by logic. I think this is precisely the point the article is making that the emotions didnot take control of crowd behaviour but logic did.
    Reply | Link to Comment
  •  
    Dec 02 11:57 AM
    All the troubles and terrorism in the world are rooted in POLITICS.!
    Reply | Link to Comment
  •  
    Dec 02 05:13 PM
    Had the same event that took place in Mumbai occurred in say, New York, the Indian stock market would have tanked 15% in the following week just as the American markets would have collapsed by 15%.

    Had the same event that took place in Mumbai occurred in say, London, the Indian stock market would have tanked 5% in the following week just as the European and American markets would have drifted down by 5%.

    I really do not think the US market really cares about terrorism - except if it is in the US and to a certain extent if it is in the EU.
    Reply | Link to Comment
  •  
    Dec 03 03:05 AM
    Bombay Stock Exchange and National Stock Exchange was closed on Thursday after the attacks, which killed 101 people and brought the security forces into two luxury hotels in south Mumbai.

    Aaron Lee Smith, MD of Superfund Financial mentions a rally coming soon but downside risks are there and eventually stocks are a dangerous place to be in.

    www.youtube.com/watch?...
    Reply | Link to Comment
  •  
    Dec 03 08:37 AM
    Interesting perspective.... but the crux of my opinion is that the general social mood defines market.

    In a bear run [which in turn is an exhibition of increasingly negative social mood] companies who underperform get hammered but those who generate results outside street's expectations [positive] just stay placid. The situation just reverses in bull market.

    Information will be seen from a general lens of social mood. And to say that 'this' news made the markets rally high is flawed. You might say the social interpretation of so and so news made it rally high.
    And this social interpretation is decided by prevalent social mood
    Reply | Link to Comment
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