We extend our sympathy to all those affected by recent terrorist attacks in Paris and around the globe. We have received many questions over the past week from clients as to effect of these events on financial markets. We would make three points in this regard.
- World markets have regularly digested terrorist incidents in the past. Sadly, terrorism has been and will remain a permanent part of the world landscape. There have been nearly 300 terrorism incidents in 2015 alone. Although the human suffering is immeasurable, the financial market impact has been limited.
- The U.S. is less susceptible today to Middle East instability due to changing energy dynamics. Historically, Middle East uncertainty affected U.S. financial markets through higher oil prices. Increased North American production of oil and gas has helped to insulate the U.S. in this regard.
- It remains to be seen how world leaders will respond. Will terrorist threats change the U.S. presidential primaries? Will the European Central Bank boost stimulus if the attacks suppress economic activity? Will European countries rally together or move toward increased nationalism? While policy makers are likely to respond in some manner, the precise outcomes are impossible to predict.
Professional investors are conditioned to buy the dip during a crisis, knowing the impact on markets is usually short-lived. This may be why the French stock market rose by more than 2% last week. Similarly, we recommend investors stay focused on their long-term goals and financial plan, and do not recommend altering your strategic asset allocation in response to terrorism fears.