I like to use the Quora.com site, and someone on there just asked me a question about how terrorists affect the stock market. Since I took the time to answer it, I might as well recycle my contribution here:
The general answer is a very unsatisfying one: “It depends.”
What I mean by this is that the market’s reaction will be very contingent upon how the market is feeling about itself in the first place. If the market is weak, and people are scared, then a terrorist attack – – or even the threat or rumor of one – – will send the market reeling (although, usually, briefly).
On the other hand, if the market is strong, it will normally shake off the news and – – oddly – – often have a very strong day. I think the reason for this is that when people see the market is pushing past the news, they figure it really IS a very strong market, and they jump in all the more.
A good example of the latter is what happened in London in July 2005. There was a terrorist attack on the subway, and the Dow closed up triple digits the next day. Had the same attack occurred in, say, October 2001, I imagine the Dow would have gone into a free-fall, since people were freaked out already.
Speaking of 9/11, obviously the days following the attack (once the market re-opened on the 17th) were nasty, but take note how soon the market bottomed and rallied mightily thereafter:
What’s fascinating to me is how weak the market was BEFORE 9/11 took place. It’s also like the market “knew” something bad was forthcoming. Indeed, the lion’s share of the 9/11 drop took place…………before 9/11.
One last example: a recent terrorist attack took place in Brussels. The market has, for seven years now, been very strong, and you can see how swiftly the horrible news was absorbed (and then ignored) by the market by this illustration of the S&P futures, which includes overnight trading:
