NEW YORK (CNN/Money) -
Terror alerts can be, well, terrifying, and they make for great headlines, but they have little long-term impact on the economy and financial markets, analysts said on Monday.
The Department of Homeland Security put financial institutions in New York City, Washington, D.C., and northern New Jersey on higher alert on Sunday, saying it had specific intelligence of possible terror attacks.
Though media outlets got agitated over the news, financial markets reacted with something of a yawn. U.S. stock prices were barely changed, showing little sign of waking from their summer slumber, but certainly not heading for the hills.
Some analysts said investors may have already decided that a terror attack is inevitable, so such threats aren't exactly news to them.
"Ever since the train bombing in Spain [on March 11], there's been an expectation built into the market that there's a pretty good chance that something like that will happen here before our election," said Dorsey Farr, senior economist and market strategist at Wilmington Trust.
Another possibility is that traders have heard so many of these specific terror warnings, along with raisings and lowerings of the oft-maligned color-coded alert system, that they may have become a little de-sensitized to them.
"It creates a short-term hesitation and a wait-and-see attitude, which will be ameliorated and will wear off in a fairly short time," said William Hummer, principal and market strategist with Wayne Hummer in Chicago. "And the more of these [terror alerts] we have, the quicker the wearing-off process."
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| | Date threat level raised to "orange" | | S&P 500 change 10 trading days later | | Nasdaq change 10 trading days later | | Sep. 10, 2002 | -7.7% | -9.2% | | Feb. 7, 2003 | +1.2% | +3.6% | | May 20, 2003 | +5.5% | +7.4% | | Dec. 22, 2003 | +3.2% | +5.4% |
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Bond prices rose on Monday -- possibly a sign of nervous flight to safe-haven investments -- but not by much. Oil prices spiked briefly to a new record -- always unhappy news for financial markets -- but retreated later in the day. The dollar, too, fell early in the morning and recovered by mid-day.
Certainly, terrorism has been a constant threat since the attacks of Sept. 11, 2001, and some analysts believe it has helped undercut stocks' performance in the years since. Of course, try separating that effect from the effects of two wars, corporate scandals, a weak job market, a looming presidential election and a host of other worries.
Some analysts, in fact, doubt stocks have discounted the threat of terrorism and other woes enough. Tobias Levkovich, chief U.S. Equity Strategist with Citigroup (C: Research, Estimates) unit Smith Barney, told the Wall Street Journal on Monday that the market's risk premium -- the amount by which investors are undervaluing stocks to account for the threat of terror and other shocks -- seemed to be lower, according to his research, than its 44-year average. Other analysts agreed.
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NYSE CEO John Thain and Sen. Charles Schumer (D-N.Y.) talk about the latest terror threat to the exchange.
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"The market is not priced for oil prices at record highs and rising interest rates and slowing earnings momentum and terrorist worries," said Jeffrey Saut, chief investment strategist at Raymond James. "People are pretty complacent out there. The assumption is that the economy is mending and that this will be a robust, self-sustaining recovery."
Speaking of the economy, it seems doubtful that the Department of Homeland Security raising its color-coded alert system to orange from yellow for a handful of banks will exactly drive people away from the malls. And businesses are unlikely to alter hiring and spending decisions based on such an announcement.
"Terrorism probably has some lingering effects on the economy," said Farr of Wilmington Trust, citing concern about how a possible future terror attack will affect business, "but that's just a mild drag on things at this point. The economy has been performing pretty well."
Farr pointed out that, despite the stunning Sept. 11, 2001, terror attacks, the economy and financial markets bounced back fairly quickly. Consumers told pollsters they felt awful, but that didn't stop them from snapping up new cars when zero-percent financing was dangled in front of them.
"If the targets continue to be specific industries such as financial firms and airlines, it's not clear that another terror attack will have strong ripple effects through the rest of the economy," Farr said.
Of course, those specific industries could face real trouble, especially if they're already on shaky ground, as the airlines were before Sept. 11. And shares of the two specific companies mentioned in Sunday's terror alert, Citigroup (C: Research, Estimates) and Prudential Financial (PRU: Research, Estimates), suffered on Monday -- but not by much.
Post-November relief?
Still, everybody agrees that the threat of terrorism isn't helping the economy or stock prices, by any stretch. Hopefully, if the high-risk events on the horizon -- the Olympics in Athens, the Republican National Convention in New York and the election in November -- pass without incident, then any lingering low-grade risk fever might be shaken off, resulting in a stronger economy and better stock performance.
"Any losses associated with near-term issues will likely be reversed by November," Anthony Crescenzi, chief bond market strategist at Miller Tabak & Co., wrote in a note to clients on Monday. "By then, worries about event-risks associated with the conventions, the Olympics and the election will hopefully have passed."
"Looking out even further toward the end of the year, investors might grow optimistic about the end-of-year economic situation, as 2004's strong job growth could be seen as raising the prospects for holiday spending, hence giving the economy momentum as it enters 2005," Crescenzi added.
Other analysts see less cause for long-term optimism -- but that has nothing to do with terrorism.
"I don't know how to handicap terrorism, other than to say that I think the risk premium should be higher than it is," said Saut of Raymond James. "But I think I can predict, directionally, earnings and the momentum of the economy."
"By my pencil," Saut said, "I think those will be less than these Panglossian pundits believe."
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