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Stock market impact expected to be short-lived

Investment advisors on Wall Street say that, if history is any guide, the economic and financial impact of Thursday's terrorist attacks in London will be short-lived.
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Stock market traders were quick to respond to the terrorists blasts that rocked London early Thursday, selling off transportation related stocks and buying up companies involved in terrorism security. But the reaction was more muted from investors taking a longer view, and investment advisors on Wall Street noted that, if history is any guide, the economic and financial impact of attacks will be short-lived.

“What tends to happen is that you get a short and sharp drop, and then a recovery,” said Ed Keon, a market strategist at Prudential Equity Group in a note to investors. “This has happened repeatedly over time, for example after the Madrid bombings a couple of years ago.”

The initial stock market sell-off was sparked by fears the attacks could touch off a global economic slowdown. Oil prices fell sharply from record highs on bets that such a slowdown would curb demand for crude. But oil prices recovered some of those losses later in the day.

Investors also feared the attacks on one of the world’s major financial centers could create a major snag in global stock, bond and currency trading. But the impact on operations at banks and brokerages in London’s "Square Mile," the heavily secured financial district, was expected to be short-lived.  

Thousands of workers struggled with the city’s damaged transport system, but key financial markets continued to function normally. The London Clearing House, LCH Clearnet, which settles stock market, commodity and energy trades, was evacuated, but operations shifted to its disaster recovery site. Trading proceeded normally on the London Stock Exchange. Major banks and brokerages, including UBS AG, Goldman Sachs, J.P. Morgan Chase & Co, Deutsche Bank AG and Merrill Lynch said business had carried on as usual. Some called on colleagues in New York to come in early to help out with trading.

Shares of major airlines and hotels fell on worries that the attack would discourage travelers from future bookings. But the Dow Jones transportation index recovered from its early lows and some analysts suggested those initial fears may have been overdone. “We don’t expect that there will be a major impact on international travel,” said airline analyst Jim Corridore at Standard & Poor’s in New York.

Stocks of some major insurance companies fell on concerns that they may be hit with claims to cover the costs of damage from the blasts, pushing the S&P index of insurance companies lower.

German insurance giant Allianz AG said it was facing exposure of $10 million or less because of its participation in a terrorist-risk coverage plan led by the British government. The insurance plan was adopted in 1993 following several attacks by the Irish Republican Army. It covers most of the cost of damage to property and business interruption by any terrorist attacks.

German reinsurance companies Hannover Re and Munich Re -- the world's largest reinsurer -- both said they were not involved in the British terror insurance plan and were unable to say what impact the blasts would have on their business.

Buying was heavy in smaller, security-related stocks, including companies like Viisage Technology Inc., a maker of face-recognition technology, and Identix Inc., which produces fingerprint and face-scanning systems and Isonics Corp., a maker of portable devices that detects explosives.

Keeping a long-term focus
Most market observers noted the financial markets have been able to shrug off terror attacks since 9/11 with limited long-term damage. In an eerily-timed report -– written just before Thursday’s attacks –- Smith Barney market strategist Tobias Levkovich reviewed the history of the market’s reaction to recent acts of terrorism.

“Major attacks on non-U.S. targets have had remarkably little impact on U.S. markets, despite their horrific consequences,” he wrote in a research note to clients Thursday. “Thus, while the mass murders in Bali and Madrid were appalling, markets were profoundly resilient.”

Analysts said investors should continue to focus on the market forces that were in place before the bombing, including the possible impact on corporate profits and consumer spending from the relentless rise in oil prices.

“To the extent that this doesn’t lead to a series of terrorist attacks or something that would effect directly the supply of oil, then I would say it has a fleeting impact,” said Stuart Hoffman, chief economist at PNC Financial in Philadelphia. “But my baseline (forecast) prior to this was a bit slower economic growth -– more because of the effects of oil depressing corporate profits and causing higher costs to consumers.”

While higher energy costs continue to weigh on U.S. companies and consumers, some market watchers believe those impacts remain relatively muted. Transportation companies have begin taking steps to blunt the impact of higher fuel costs, John Welch, a senior broker at Peregrine Financial Group, told CNBC.

“The surcharges that airlines have put on have stuck this time,” he said. “We will probably continue to see additional transportation surcharges, from trucking companies, including probably the U.S. Postal Service here pretty soon. But I'm not sure yet whether that has made a difference in consumers' ability, in the United States anyway, to continue to spend money. “