Monday , 24 April 2017

True or False: Terrorist Attacks Cause Stock Markets to Drop

It seems logical that a scary, destructive terrorist attack, particularly one that impliesriot-police more attacks to come, would be bearish for stock prices – but has that actually been the case?

By Vadim Pokhlebkin/Robert Prechter ( originally* entitled Myth #8: “Terrorist attacks would cause the stock market to drop.”

The exogenous-cause model would have us believe that all of the exceptionally dramatic swings in the DJIA as shown in Figure 17 below must have been caused by equally dramatic news: bad news at each of the peaks and good news at each of the bottoms.

As it happens, there was indeed a lot of dramatic news during this time:

  1. a surprise terrorist attacks on U.S. soil, first the “9/11” attack on the World Trade Center and the Pentagon and
  2. a slew of mailings of deadly anthrax bacteria, which killed several people, prompted Congress to evacuate a session, and caused havoc lasting months.

Where on the graph of stock prices would you guess all these events have happened? If you guessed “six trading days from a major bottom and all through a six-month rally,” you would be correct – but if you are an exogenous-cause advocate, you would not have made that guess. Figure 18 notes these occurrences.

The 9/11 attack occurred more than half way through a dramatic price decline and only six trading days from its end. Afterward, despite deep concerns that more such attacks were in the works, the stock market rallied for six months.

The first anthrax attack occurred on the very day of the low for the year, and the attacks, deaths and scares continued throughout the strongest rally on the entire graph. To put it more starkly, the market bottomed when they started and topped out as soon as people realized they were over.

If one were to insist upon a causal relationship, one would be forced to conclude that anthrax attacks are bullish for the stock market.

This kind of perverse conclusion is what we invariably reach when examining an exogenous-cause case along with actual data pertaining to it. This is why economists after World War II (see Figure 12 in Part VII) decided that wars were good for the economy. Figure 18 has similar implications for public policy. Should we encourage crazed people to send deadly packages in order to get the stock market to go up? This idea is no dumber than advocating war to get the economy rolling but the evidence for it is right there, just as it was for the supposed “oil shock” of 1973.

We have uncovered at least one irrefutable fact: Terrorist attacks do not make the stock market go down. The assumption behind economists’ repeated implications that terrorist attacks would constitute an “exogenous shock” that would serve to drive down stock prices is shown to be completely wrong…

[The above article is presented by  Lorimer Wilson, editor of and and the FREE Market Intelligence Report newsletter (sample hereregister here) and may have been edited ([ ]), abridged (…) and/or reformatted (some sub-titles and bold/italics emphases) for the sake of clarity and brevity to ensure a fast and easy read. The author’s views and conclusions are unaltered and no personal comments have been included to maintain the integrity of the original article. This paragraph must be included in any article re-posting to avoid copyright infringement.]

* (© 2014 Elliott Wave International)

If you liked this article then “Follow the munKNEE” & get each new post via

Related Articles:
Most economists (primarily Keynesians and monetarists) believe that authorities can control the money supply and interest rates, and most neo-Austrians believe that the Fed is all-powerful when it comes to inflating – that whatever inflation rate it wants, it simply manufactures. Is that true or false? Read on for the answer. Read More »
This one seems like a no-brainer. The government or the central bank prints more bonds, notes and bills, and prices for things go up in response. Gold is real money, so it must fluctuate along with the inflation rate. It’s basic physics but it doesn’t happen that way. Let’s examine the history of inflation and the precious metals since the low of the Great Depression. Read More »
It would seem logical to say that peace allows companies to focus on manufacturing goods, providing services, innovation and competition, all of which helps the overall economy but does peace, in fact, have anything to do with determining stock prices? Read More »
A sensible story of causation regarding oil prices and stock prices made by countless economists is that “rising oil prices increase the cost of energy and therefore reduce corporate profits and consumers’ spending power, thus putting drags on stock prices and the economy.” Stunningly, as far as I can determine, however, no evidence supports that claim, as the discussion below will show. Read More »
Q: Is it correct to assume throughout that an expanding trade deficit impacts the economy negatively? A: No, the relationship, if there is one, is that there has been a positive — not negative — correlation between the stock market and the trade deficit. Let me explain. Read More »
The belief that earnings drive stock prices powers the bulk of the research on Wall Street but this glaring exception to the idea of a causal relationship between corporate earnings and stock prices challenges that theory. Let me explain. Read More »
It is common for economists to offer a forecast for the stock market yet add a caveat to the effect that “If a war shock or terrorist attack occurs, then I would have to modify my outlook.” As such, it would seem logical to assume that…they must have access to a study showing that such events affect the stock market, right? The answer is no, for the same reason that they do not check relationships between interest rates, oil prices or the trade balance and the stock market. The causality just seems too sensible to doubt. Read More »
Macroeconomic news supposedly explains only about one fifth of the movement in stock prices but if there is no accommodating theory, then the presumed causality involved is tenuous at best. Let me explain. Read More »
Events and conditions do not make investors behave in any particular way that can be identified as shown in this analysis of the supposed relationship between interest rates and stock prices. So much for the popular claim that “Interest rates drive stock prices”! Read More »