A Costly Lesson

We wish it hadn't happened this way, but the latest attacks show the stability of world markets

By Joseph Lisanti

For many people, the London bombings of July 7 brought back vivid memories of the September 11, 2001 attacks that destroyed the World Trade Center and damaged the Pentagon. Though the murderous intent of the attackers was the same, they did far less damage this time. Yet, the message is clear: We can never be completely protected from people intent on killing to further their ends.

Although the tragic loss of life in London is distressing, one lesson is that the financial markets can withstand such a shock. European stock markets all closed with losses of less than 2% on July 7, and U.S. stocks rose. It may be that the world has now become so accustomed to random violence on a mass scale that, after an initial knee-jerk reaction, markets go back to what passes for normal.

That wasn't always the case. On the first trading day after Pearl Harbor, the S&P 500 fell 4.4%. It took 18 trading days for the market to bottom at 10.8% below its close before the attack. Recovery to the pre-attack level would be 257 trading days from the initial shock.

Sam Stovall, Standard & Poor's chief investment strategist, looked at the market's reaction to a half-dozen shocks over the past 65 years: Pearl Harbor, the Cuban missile crisis, President Kennedy's assassination, Iraq's invasion of Kuwait, September 11, and last year's bombings in Madrid. Stovall found that the average one-day decline was 2.9%. The bottom was 6.3% below the closing price prior to the shock, and it was reached in six trading days. Full recovery arrived, on average, in 55 trading days.

The quick market rebound in the wake of the London bombings reinforces our opinion that stocks will strengthen in the second half of 2005. At least some investors appear to have learned the lesson of perseverance. But it's a shame that the cost of that lesson was so high.

Lisanti is editor of Standard & Poor's weekly investing newsletter, The Outlook

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