plummeted to negative 220 (and worse) as soon as the news of a attack broke.
That suggests to us a few hair-triggered traders had assumed the worst. Their
bets essentially discounted the possibility of a minor assault. As that proved
to be the case, they reversed their short positions, and went long.
reactions tend to be proportional to body count (see NY/DC, Madrid,
London). Hence, short-term wash-out occurred as events unfolded: London turned
out to be a less horrific attack than Madrid. In effect, the wash-out turned
into a terror rally. But as we have noted, Markets have a tendency to
wobble, over-reacting one way and then the next. Afterwards, they revert to
their prior courses.
The reason for this
is simple – terror causes far less financial damage than does a good Hurricane.
And, the total loss of life from terror over the past decade doesn’t compare to
a year’s worth of auto accidents in the US. Once the initial adrenaline-charged
response subsides, you are left with a horrible event from a Human standpoint,
but a relatively insignificant one from an economic perspective.
Put the disruption
into context: consider the multi-trillion global economy, or the even larger
global capital markets. The economic damage simply doesn’t scale up to the
trillions and trillions of dollars global commerce generates.
This doesn’t imply
we should be complacent. Indeed, in the United States, there is a lot more we
can and should be doing to ensure that a catastrophic assault is as
close to impossible as we can make it. But the grim reality is that any maniac
can walk onto a subway or bus and blow it up. And as we’ve seen, the timing of
these assaults are during rush hour to maximize damage to soft targets
(civilians) and ensure media coverage. The daylight assaults generate dramatic
video footage, and the early morning timing all but guarantees front-page
headlines the next day.
Where does that leave investors as of right now? The markets were consolidating after the run up from the April lows. I would expect that process to continue, so as the terror related emotions fade, so too, might the markets. The thrust off of the 2005 bottom indicated an institutional change in attitude towards risk and equities.
That implies to us that a strong second half rally continues to be in the offing, barring any additional external events. Investors can use any weakness in July to accumulate long positions.