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The Economic Impact of ISIS

On November 13, the world watched in horror, as 129 mothers, fathers, brothers, sisters, husbands, wives, and children were senselessly murdered by a group of radical Islamic militants that we have become all too familiar with.


There is absolutely nothing we can do to dry the tears of the families of those lost, nor quell the fears that all of us feel today as a result of what we witnessed. Like you, I have spent much of the last week wondering what's next.


A natural fear related to a perceived increase in global terrorism is how will it impact the market. I spoke to many colleagues and clients on Monday who were concerned that the Paris and Beirut attacks would flip the switch on another market correction.  With fear so rampant these days, let's spend a moment looking at the facts.


FACT # 1: History shows us that terrorism does not cause long-term damage to global markets. While individual companies certainly suffer when there is an attack directly in their midst, their respective industries do not. Let's take, for example, September 11th, 2001, a terrorist attack that hit the largest world economy directly at its epicenter. In the week that followed, the Dow Jones Industrial Average fell 14.3%, which included a then-record 7.1% one-day loss. However, if you expand your view, the six months following the worst terrorist attack on U.S. soil, the Dow Jones was up 17% while the S&P 500 (the measure of the 500 largest U.S. companies) was up 10%. It wasn't until early Spring of 2002 that the U.S. economy saw a downturn, and that was residual from a European economic downturn that had been suffered a year earlier, among other factors.


FACT # 2: Individual Sectors face larger risks than national economies in the wake of terrorist attacks. It should come as no surprise that travel and tourism related stocks were the biggest losers in the U.S. market on the Monday following Paris. Priceline, Expedia, Delta Airlines, and American Airlines were among those who suffered, along with cruise operators and other agencies who specialize in international travel. Given the time of year, this attack could cause some negative financial backlash during retailers' and tourism depots' most important time of year. Anecdotal evidence suggests that British shoppers remained home over the weekend, unnerved by reports that additional security personnel had been assigned to patrol shopping areas in London's busy West End and in popular shopping malls. Threats to New York and Washington D.C. could have people changing their plans, which could cause popular retailers to come up short on expected financial goals.


FACT # 3: ISIS failed to cause major economic trouble in Paris. Financially speaking, the fact that the Paris attacks happened on a Friday served as a good buffer for the global markets. Let's face it. Fear is an immediate emotion. When rational thought has time to creep in, fear subsides. That is why terrorist attacks are largely to blame for short-term political changes and not long-term ones. Human nature is that we go back to normal, and quickly. We saw that by the time Monday rolled around after Paris. The Dow Jones Industrial Average was up 1.4% on Monday, November 16th, and 2.8% in the week that has followed. Even the CAC 40, France's stock exchange,  never saw more than a 2% dip during the day following the attacks, and is actually up by 2% in for the week.


While signs point to history repeating itself in terms of the financial impact of terrorist attacks, economists do have some cause for concern. While a downturn in travel stocks is a common, and typically transitory, reaction to threats and acts of terrorism, a more lasting effect could come from the economic impact of fearful consumers and tighter borders. The damage to Europe's Schengen zone, which allows freedom of movement amongst 26 European countries, may be longer lasting. A number of nations had already erected temporary border controls in the face of the unprecedented wave of migrants fleeing the Middle East and Africa. Reports that one suspected assailant in the Paris attacks had entered the Europe through Greece, on a Syrian passport, could prompt member countries to restore travel checks in a hurry. Once installed, new restrictions could prove difficult to dismantle.


We live in a new world. A world in which websites and 24-hour news networks post surveillance footage of terrorist attacks and show pictures of victims lying in the exact place where their lives were cut short. A world where fear feels like the singular most powerful trigger to the market's ups and downs. All we can do is remain vigilant and understand that there is a big difference between fact and fear.



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