What the Boston Bombing Means for the Economy and the Stock Market

Unless the Boston Marathon bombings are part of a much larger plot, it seems unlikely that their effects on the stock market will last more than another day.

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Terrorism poisons everything. The greatest damage, of course, results from the lives that are lost and the people who are injured. Nonetheless, it’s natural to wonder whether an event such as yesterday’s bombing at the Boston Marathon is likely to have a longer-term impact on the economy and the stock market.

Anything that makes people more anxious and uncertain about the future has a negative effect on business and on stocks. The bombing occurred shortly before 3 p.m. E.T., and the Dow — which had earlier in the day started to rally from the day’s lows — fell another 120 points in the last hour of trading.

Is that likely to be it? Or should investors expect further big losses over the coming days and even weeks? The attack on September 11, 2001, seems to suggest that the effects of a terrorist attack might be long lasting. Following that tragedy, the Dow dropped 1,400 points and needed more than two months to get back to even. However, it’s worth noting that at the time of the attack on the World Trade Center, the Dow was already down 1,500 points from the year’s high. And after the market made up its losses from 9/11, it went on to gain another 1,000 points in the first four months of 2002. So clearly there were other factors driving stock prices.

Moreover, not all incidents have such a drastic impact. In fact, it’s possible to divide terrorist acts into four categories with dramatically different economic results:

  • Attacks on individual companies. Terrorism that targets a specific company — such as the kidnapping of employees or the bombing of offices — has a damaging effect on the shares of the company targeted. In some cases, a stock can be hit hard and have a sizable loss. But overall, the effect tends not to be very great. A recent study found that in 75 incidents, the average stock-market loss was only 1% or 2%. Competitors were not affected one way or the other.
  • Attacks on the energy sector. One industry that is uniquely vulnerable to terrorism is oil and gas. Supply and demand are closely matched, and there is little flexibility in either. This inelastic market can therefore suffer significant price swings if any part of the oil supply is impaired. Even the threat of terrorism adds a “terror premium” to the cost of oil. One study calculated that this can run anywhere from $2 to $10 a barrel. And given the size of the market, this works out to between $60 billion and $300 billion. And of course, terrorist activity that actually threatened the developed world’s oil supply would be extremely serious and might lead to military action that would be vastly more expensive.
  • Attacks on the financial system. One of the things that made 9/11 so serious was that it disrupted financial activity in New York City, including the stock market. Indeed, the markets were closed for four trading days, the longest shutdown since 1933. A number of other banks and brokerages were brought to a halt as well, which magnified the effects further.
  • Attacks on a massive scale. Any form of terrorism could conceivably have long-lasting economic effects if it were on a large enough scale or were repeated multiple times. A string of bombings at various train stations, for example, could disrupt commuter travel across the country. Multiple attacks at shopping malls might have a significant impact on retail sales. And if sufficient uncertainty were created, the economic effects might last long after the terrorist attacks themselves had ceased.

Most incidents, however, don’t rise to a level at which they would do long-term economic damage. Assuming — hoping — that yesterday’s Boston Marathon bombing is not followed by a string of similar attacks, the most apt precedent might be the July 7, 2005, blasts in London, when three trains and a bus were targeted, 52 victims were killed and 700 were injured. In response, share prices quickly fell 3% or 4% in the U.K., France and Germany. But stocks started to recover before daily trading ended. And in the U.S., the stock market actually closed higher.

Indeed, terrorist attacks that are not focused on specific vulnerable targets, such as the oil supply or the financial system, tend to dissipate fairly fast. A study of al-Qaeda attacks found that only half of them had a substantial impact on the stock market and that the effects were fully felt within an hour or so.

Unless the Boston Marathon bombing is part of a much larger plot, it seems unlikely that their impact on the markets and economy will last more than another day. That’s no guarantee of a stock-market rebound; there are plenty of other factors — from the lousy U.S. economy to the rising danger of defaults in the euro zone — that could derail share prices. But as far as Boston is concerned, it’s the human cost, not the financial or economic impact, that should trouble us.