The Long Term Investing Impact of the Paris Attacks

Last week’s horrific terrorist attacks in Paris were a reminder that, unfortunately, the ongoing fight with global terrorism is still with us, and my thoughts are with those affected by the tragedy.

In a new paper, “After the Paris Tragedy,” the BlackRock Investment Institute recently shared some insights on how this significant escalation in the intensity of the terrorist threat could impact the economy and markets going forward. Here are three of the key points.

Episodes of terror tend to accentuate existing economic and market trends, rather than constitute turning points. The market impact of past terror episodes, including the 2005 London bombings and 2004 train bombing in Spain, was generally ephemeral, according to a BlackRock analysis of data accessible via Bloomberg. In other words, the attacks created headlines, become market talking points and then disappeared. If anything, they heightened the trajectory of the economy and markets. For instance, the September 11 attacks magnified the 2001 U.S. tech bubble recession, but didn’t cause it.

Similarly, in the near term, the tragedy in Paris is likely to bolster economic trends already underway in Europe. The fallout from these attacks will probably put some pressure on the French economy as well as the euro. A likely (but reversible) dent in European consumer confidence should cement plans by the European Central Bank (ECB) for more easing measures in December. Meanwhile, France will likely further loosen the austerity reins to boost defense spending, with other European Union (E.U.) members following suit.

The longer-term impact of Paris could be different. The cause of the Paris attacks is rooted in a systematic breakdown of state control in the Middle East. The region is dogged by the aftereffects of the Arab Spring, sectarian conflicts and proxy wars between Sunni Saudi Arabia and Shiite Iran, and this cycle may just be getting started, as seen in recent attacks on civilians and the bombing of a Russian airliner.​

With the Islamic State (ISIS) and its affiliates set on internationalizing their reach, the terrorist threat against the West is likely the highest it has been since 2001. If the Paris tragedy marks an evolution toward an extended, global conflict, the market impact could be much greater than past terror attacks stemming from regional conflicts.