It seems like every week there’s another major terrorist attack somewhere in the world. The frequency and scale of it all causes so many feelings: frustration, anger, fear and helplessness among others.
It also brings many questions to bear. When you’re forced to consider the safety and security of all the aspects of your life, you’re bound to wonder about your financial security as well.
How does terrorism affect the economy? How does it affect you?
While many uncertainties will always be a part of life, you can rest assured seeing exactly how attacks affect the economy and your personal finances.
Immediate Effect
If you think back to personal memory, you’ve likely seen stock markets, currency values and most things related to international trade dip every time there’s a new attack. This is pretty normal, as exchange values are mostly floated by confidence levels.
The inevitable uncertainty tied to terrorism has a predictable impact, and directly after any activity you’ll see local markets suffer. The effects grow more widespread when the attacked region represents a larger share of the global economy. This is why a small attack in the U.S. will still see more global losses than a larger attack in a struggling economy.
Direct Impact
Knee jerk reactions are one thing, but how does terrorism directly impact an economy? Many countries face a near daily threat of danger, and yet they still manage to be big players in global exchanges. Pretty much since 2001, a large number of economists have studied the direct relationships between terror activities and the local economies.
For most of that time the assumption was what you would expect — terrorism hurts economies by taking goods and labor out of the market and by reducing productivity by demanding more security. Think about how much time Americans lose in airport lines and you’ll get the idea pretty quickly.
New research, spearheaded by Subhayu Bandyopadhyay and Todd Sandler, suggests that there are actually a lot of market conditions where terrorism can have a positive impact.
Essentially, domestic terrorism will reduce local consumption and force more international trade. If the traded goods are the right commodity, their increased scarcity improves their value and the net change for the economy is beneficial.
Now, this doesn’t suggest that a healthy dose of terrorism is just the jumpstart a stagnant economy needs, but it does help scholars understand why terror ridden economies haven’t collapsed.
The Long Run
Here’s what you really want to know. What does terrorism do to markets in the long term? This is how you can determine the security of your savings, retirement and other major investments.
There’s good news. Overwhelming evidence shows that terrorism has had a negligible effect on the global economy. It turns out, all of those efforts to break western culture are in fact failing. Don’t take it on faith; there are plenty of examples that you can see for yourself.
Most of the modern and applicable data will date back to 2001. Some of the most recent attacks this year, such as the bombings in Turkey, are too recent for reliable numbers, but there are four major incidents over the last 15 years that are worth noting because they had the biggest impact.
In 2008, a string of attacks killed 164 people in Mumbai. The tragedy saw market drops that you would expect, totaling a loss of 2.6 percent across the exchange. A month later though, net change in the market was a 10.9 percent increase.
London was attacked in July of 2005. The immediate results were a staggering 4 percent drop. By the end of the year, that was more than replaced when the index finished 7.4 percent above the year’s start.
Madrid was shocked in March of 2004, and the initial loss hit 7.6 percent. By the end of the year the markets didn’t notice when they closed with 9.5 percent growth.
Then, of course, there was the U.S. attack in September of 2001. The terrorists directly hit the stock exchange, and it was closed for the better part of a week. When it reopened, markets crashed when the S&P 500 dropped 13.5 percent in a single day. By the end of the year, those losses were also forgotten with a year-end growth of 5.1 percent.
The evidence is abundant and clear. Terror attacks are reprehensible in every way, but they are not a threat to your long-term financial security. Invest with confidence and plan for a bright future.
Regards,
Ethan Warrick
Editor
Wealth Authority
