(MONEY Magazine) – How do you explain a situation in which consumer confidence is surging, corporate earnings are improving and yet the stock market remains mired in a six-month funk? Greg Valliere, chief political strategist at Schwab Soundview Capital Markets, has an answer: It's fear of terrorism.

Valliere finds it significant that after more than a year of recovery, stocks hit a wall in March, around the time of the Madrid bombing. Recently, as apprehension has spread about al Qaeda's supposed plans to disrupt the U.S. elections and strike major financial institutions, trading volume on both the Nasdaq and New York Stock Exchange has weakened. Small investors have put less money into equity funds, and ultrasafe bank savings deposits have reached an all-time high.

"Anyone who isn't worried about an attack on our homeland just doesn't have a pulse," says A.G. Edwards market strategist Al Goldman.

But what are you supposed to do besides worry? Goldman's answer, counterintuitive as it may be: buy. When investors are feeling the most scared and hopeless, he says, "that's the time to invest in stocks." History bears him out, as the chart below shows. Six months after the Sept. 11, 2001 attacks, the S&P 500 was up 11%. In hindsight, the gut-wrenching losses of 2002 may have had more to do with Enron-itis and tech and telecom bloat than fallout from Sept. 11.

Emotionally, of course, acting on Goldman's advice is easier to say than do. More terrorist attacks could well trigger another crash in the markets. It would be hard to resist the urge to retreat from equities and anything else that seems risky.

But even if future blows are more destructive than Sept. 11, life and business would go on. Consider a living worst-case scenario: Israel. However successful al Qaeda is at infiltrating the U.S., the number of terrorist attacks here will surely never approach those in Israel, where suicide bombings are a fact of life. When the Palestinians declared intifada in September 2000, the Tel Aviv 100 index tanked, but by September 2003 it had begun a steady climb. The Israeli market has now returned 7% since the start of the intifada; over the same stretch, the S&P 500 is down 15.8%. "If we take a look back at all the terrorist attacks over the past 25 years, there really haven't been any that resulted in a material, sustained stock market decline," says Jeffrey Kleintop, chief investment strategist for PNC Advisors.

Indeed, Jim Huguet and Matt Stephani of Idex Great Companies America fund are so convinced that an attack would create a buying opportunity that they recently raised their cash position from 2% to 7%. If there's a terror-sparked sell-off, says Huguet, "we'd like to have money to invest."

And what of the market's current anxiety? Valliere thinks it could yield to a rally if the country makes it through the end of the Republican National Convention unscathed. "There's so much money on the sidelines," he says, "that if we get through Labor Day, you could definitely see gains from pent-up buying."

The danger of terrorist attacks won't end with the summer, of course. For the years of uncertainty ahead, the best preparation is a resolution not to panic. The lesson of history is clear: Terrible things can happen, but people and markets adapt.

ADDITIONAL REPORTING BY MEGAN JOHNSTON AND TARA KALWARSKI