A vicious and scary terrorist attack hits London, and the Dow rallies almost 500 points off the overnight lows the futures reached immediately after the attack. All of the major stock indices in the U.S. are now higher just one day after the attack than they were before it. Remarkable. The markets' reaction to the terrorist attack is about 180 degrees from what most people initially expected.
Two questions come to mind as you watch this action. First, why did the markets react this way? Second, is there any way this rally is sustainable?
The answer to the first question isn't quite as simple as saying that "terrorism was already priced in," though that is certainly part of the answer. Aside from how much terrorism might be discounted into the prices of stocks right now, the answer also lies in terrorism's impact (or lack thereof) on the fundamentals of the companies in the market. Think about how you reacted to the news of Thursday's terrorist attacks. Did you immediately call your closest friends and family to check on their whereabouts and talk about your fears of whether or not the U.S. would be the next target? How would you have reacted to these horrific events before 9/11 and before the Madrid bombings? Probably much differently than how you did this time.
It seems that we've all but accepted that terrorist acts will take place in major cities around the world. You live in London or New York? You're probably going to have to deal with another bombing at some point. Did Thursday's terrorist attacks do anything but confirm that reality? Not really. And it probably didn't affect yours or your company's actions much at all either. Which means that whatever your outlook was on the global economies and specific company fundamentals on Wednesday when the market closed, that should probably still be your outlook.
The Teleconomist A Cool Reaction Is of Keen Importance 7/7/2005 3:01 PM EDT Separating emotion from trading helps maintain perspective in the face of unsettling events.
The Teleconomist Live 8 Strikes Bad Chord 7/6/2005 3:30 PM EDT The consumer demand for online access to this concert shows that the content battle may end as quickly as it began.
The Teleconomist Siding With Tech Bulls in Second Half 6/28/2005 3:47 PM EDT Oil and the Fed loom large, but fundamentals in the sector still look strong.
At time of publication, the firm in which Willard is a partner was net long Tellabs and OmniVision, although positions can change at any time and without notice.
Cody Willard is a partner in a buy-side firm and a contributor to TheStreet.com's RealMoney. He also produces a premium product for TheStreet.com called The Telecom Connection and is the founder of Teleconomics.com. The firm in which Willard is a partner may, from time to time, have long or short positions in, or buy or sell the securities, or derivatives thereof, of companies mentioned in his columns. At time of publication, the firm in which Willard is a partner had no positions in any of the securities mentioned in this column, although positions can change at any time and without notice. None of the information in this column constitutes, or is intended to constitute, a recommendation by Willard of any particular security or trading strategy or a determination by Willard that any security or trading strategy is suitable for any specific person. Willard appreciates your feedback -- click here to send him an email.
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