On November 13, the magnificent city of Paris was attacked by cowards – men whose feelings of hopelessness and disaffectedness were channeled into senseless violence against innocent people. This came only one day after a pair of suicide bombings killed 43 in Beirut, and just two weeks after a commercial plane was downed in Egypt (also a suspected terror attack). The natural human response is an emotionally intense one – fear, doubt about the future, flight to safety.

It pains me to write articles like this one, where the anger I feel towards terrorists mixes uncontrollably with the grief and compassion I feel for the victims and their loved ones. It’s not easy, but my message to investors is: it is very important to remain optimistic and not allow your emotional response dictate your investment approach. Markets – in understanding the relentless resolve of the human spirit and our ability to innovate and grow – have demonstrated time and again their resilience to terror attacks. I don’t think this time will be any different.

Continue to Focus on Fundamentals

There are instances when a geopolitical event can trigger a change to the market’s general direction as the event alters consumer patterns, credit markets, or a corporation’s desire to invest. The Paris or Beirut attacks alter none of those things, and our economic and market outlook is precisely the same as it was before the attack. Investors should stay steady.

The market signaled as much to us on Monday, the first day of trading following the attacks. U.S. markets posted their strongest session in three weeks, with all 10 major S&P 500 sectors trading higher. The Energy sector saw the biggest gain, rising +3.25%. Investors likely bid-up prices anticipating increased tension in the Middle East would push oil prices higher in the near term – they’re probably right.

Where the market did feel some negative pressure, perhaps not surprisingly, was in the travel and leisure subsector. Most major airlines traded lower and travel companies like Expedia felt some downside pressure. I see that as a sentiment knee-jerk reaction, not necessarily the start of a bearish trend for companies in that space – there could be some buying opportunities there if it persists.

Overall, the market traded higher on somewhat lower than average volume, but not by much. It’s a reminder to us that the markets have essentially developed a thick skin to these attacks, having seen the resilience of the global economy after previous incidences.

The Market’s Historical Resilience

Looking back at three recent terror attacks underscores the market’s resilience. Equity pullbacks that occurred following the Madrid train bombings in 2004 and London bombings of 2005 were recovered only a few days following the attacks, and the markets posted solid positive years after both instances. In 2004, the S&P 500 was up +10.88% and in 2005 it notched 4.91% higher.

The most recent example that draws some parallels to Paris is the Boston Marathon bombings, which took place on April 15, 2013. It was no more or less devastating than the Paris incident – or any act of terror for that matter – and resulted in a similar human response of anger, fear, resilience, and resolve. The market responded with the anticipation

that the economy would remain strong and that the world could continue growing, both of which proved to be true.

The S&P 500 in 2013

SP_500_in_2013

Bottom Line for Investors

In the wake of tragedies like these, I think it’s important for people to reflect on the positive things in their lives, grieve for the victims but, most importantly, move forward with life the way we want to live it. Don’t let pessimism set in.

At the end of the day, everyone’s emotional response is different, but I think the investment response should be the same across the board – don’t let fear or concern you feel about the world perpetuate a ‘flight to safety’ in your portfolio, unless your goals have changed materially. The outlook for equities before the attacks is almost precisely the same as it is today, and the world should bounce back from this tragedy just as it has done before.

 

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