With the events in Boston a week ago and the continued tension
between North and South Korea, it's important to understand how a
terrorist attack affects stocks, and specifically which sectors it
dings the hardest. Though each attack is different, they
significantly affect certain sectors, while other parts of the
market prove to be impervious and react to a much lesser degree.
Terrorist attacks are becoming more common. Small bombings seem to
occur with frequency, while larger-scaled attacks - such as New
York (2001), Spain (2004) and London (2005) - occur less often. All
attacks disrupt normal life. They create a sense of havoc, destroy
infrastructure and most significantly they cause a loss of human
With the help of several different research reports, I'll share
with you those industries and sectors most reactive to terrorist
attacks. However, the only consistent reaction seen among those
research reports is a rise in instability, which causes the CBOE
Volatility Index (VIX) to increase. In fact, we saw just that last
Monday when the VIX vaulted 43% to 17.07.
In addition to the VIX, Chen and Siems found that equities react
negatively to terrorist attacks, concluding that 94% of their
samples had negative returns directly corresponding to the event.
However, they also found that U.S. stocks recover faster than
foreign ones, believing that the abundant liquidity helps smooth
A research report by Lyroudi and Kalivis focusing on the 1995
Oklahoma City bombing concluded that the aerospace, airfreight, oil
and retail industries had a smaller negative response on average on
the event day. Conversely, airlines, insurance and transportation
stocks had abnormal negative returns, with airlines being the
The results are somewhat surprising - especially the responses from
retail and airfreight - since it goes against traditional beliefs
that consumers will be reluctant to make new purchases. The
negative response from airline stocks should not surprise readers.
This report also looked at the impact on those same industries two
weeks after the event. Transportation, airfreight and retailing
exhibited the largest abnormal declines during that period.
This is an especially exciting revelation because transportation
stocks have been some of the top performers this year thanks to the
boom in shale oil production from regions in the Bakken and
Marcellus formation. So a two-week pullback gives you the chance to
buy great companies at bargain prices. In fact, we're doing just
that in my stock service
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An IMF report compiled by Johnston and Nedelescu (using data
from the Chen and Siems research) showed the impact the twin towers
attack in New York had on global indices. Though all indices traded
lower following this event, the rebound was shorter for more
developed economies. The U.S. fully recovered within 13 days while
Tokyo took only six days to recoup event-day losses.
Will the reaction to Boston be the same or could this time be
Terrorist attacks generally result in immediate negative stock
performance. And research shows that these events often cause
abnormally negative responses, especially to the insurance and
However, there is no surefire bet as to what industries will
drop or pop. Moreover, these abnormal declines may last anywhere
from two days to a few months, making the timing of bearish trades
More often than not, attack-driven declines have offered buyable
dips. However, central banks have often flooded the economy with
liquidity in response to past events. Since central banks are
already doing that now, the reaction to the latest attack may prove
different, and declines may last longer. Additionally, the indices
have roared higher to start the year, and deserve a pullback.
Also, sector reactions were different this time. Oil and gas
declined as severely as airlines and insurance. However, oil and
gas stocks stayed lower while airlines and insurance stocks rallied
the day following the event.
Retail (blue), United Parcel Service (red), Insurance (dark
green), Airline (brown) and Oil and Gas (lime)
Contrary to prior research, the airlines recovered the next day and
proceeded to rally to a five-day high. Retail hasn't fully
recovered, but it recovered well the next day, too.
To bring us full circle, attacks are generally bearish for stocks.
And that's been no different this time around. However, equities
always recover eventually, with stocks in developed economies such
as the U.S., Japan and Germany tending to rebound more quickly.
Though this decline may persist for another week or two, investors
should be more eager to buy than to sell. I'd recommend looking for
stocks in the transportation sector first since many of them are
great companies and these stocks tend to have abnormal negative
reactions lasting about two weeks before rebounding.