Not Shrugging Off – Just Shrugging

Numerous analysts were on the tube yesterday explaining how markets usually just "shrug off" terrorist events.  For instance, market veteran Sam Stovall, of S&P Marketwatch, trod out the data from five unanticipated shocks — 9/11; Iraq’s invasion of Kuwait on 8/20/90; the Kennedy assassination on 11/22/63; the Cuban missile crisis on 10/20/62; and the attack on Pearl Harbor on 12/7/41 — along with the S&P 500 price performances after the first day of trading since the event, the number of days it took the "500" to bottom, its total decline in price, and, finally, by the number of days it took until the S&P 500 closed above the level prior to the shock event.

Shocks take a toll on investors’ nerves, as seen in the average 3.2% one-day decline in price following the five events. Yet the number of days the market was in free-fall was encouragingly short at only five days (excluding Pearl Harbor, the average was four days), with the total price decline before the market sought a near-term plateau being 6%. The most surprising statistic, in our opinion, was that the S&P 500 was trading at a new high only an average of 62 days later (and an incredible 14 without Pearl Harbor).

If investors really do "shrug off" the terrorist attacks in London, then I think we are on the verge of moving higher.  Large moves in stocks often follow events which makes investors feel invincible – a continuous re-enforcement of the "buy the dips" mentality.  This happened in 1998 after Long Term Capital Management blew up and the Fed came in to support the market.  The LTCM bottom occurred after investors had successfully bought the dips for over a decade starting with 1987.  Of course, this mentality eventually led to the largest financial bubble in history but that’s a moot point right now. 

If terrorists, Fed tightenings, flattening yield curves, and higher oil prices can’t take the market down, then the market will probably go up.  While others are "shrugging off" the terrorist attacks, I’m just shrugging and trying to figure out what investors are thinking.  And right now it looks like the "buy the dips" mentality is back.