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A Rising Wall of Worry: Rates, Recession and the Response to Terrorism

In the week just passed, the S&P 500 declined 3.6%. Not a factor in last week’s swift selloff was the response to the terrorist attacks in Paris, which will likely further dampen investors’ spirits and may add some velocity to the current slide in global equity prices.

In response to the attacks in Paris, we think gold and safe-haven currencies, like the U.S. dollar, Swiss franc, and Japanese yen, will likely strengthen. In turn, we see a weaker euro. Oil and energy stocks might also firm, as the terrorist actions re-introduce supply uncertainty into the energy equation. Defense stocks should get a pop, while airlines and travel & leisure stocks likely sag.

Yet because we don’t see these terrorist actions causing substantially more weakness to the global economy, we believe any share price decline will be short lived. Following selected market shocks since WWII, the S&P 500 experienced an average one-day decline of slightly more than 2%, and fell nearly 6% before bottoming 11 days later.

Shocks to the System: S&P 500 Price Reactions Since WWII

The market got back to break even in less than a month, however, after investors concluded that most shocks would not result in recession. What’s more, market responses after bombings and shootings caused the market to fall even less, bottom sooner and recover faster than otherwise was the case.

So there you have it. The market thus far in November has been undergoing an uncomfortable digestion of the unhealthy rapid overindulgence experienced in October. It now has to contend with the uncertainty surrounding the aftermath of the Paris terror attacks.

History says, but does not guarantee, that market weakness following such horrible events is typically short lived and advises investors not to add remorse over selling equities into this weakness to the grief we are now experiencing over the loss of innocent life.

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