The awful events in Paris in November metered out by IS extremists, highlights how vulnerable we all are to terrorism.
The way Europe, especially, has come together in the aftermath is admirable and the global coordinated backlash will hopefully make would-be martyrs think twice about copy-cat actions. The reaction of the families and communities effected and the stoicism shown always amazes me.
On Monday mornings I look at the financial markets as they open to gauge the market’s reaction to the weekend’s events. It is remarkable that despite the turmoil caused by these events, the major stocks and shares indices were unaffected. It is as if the City Traders and Investment Banks rally round and refuse to let terrorism ruin capitalism. In fact, the FTSE100 in the week following Paris, had a particularly positive few days rising by over 3%.
This encouraged me to look at other past events and market reaction. Following the 7/7 London bombings the FTSE100 fell only 1.25% on the day and only 24 hours later, ended up at the same level as before the bombings.
The obvious exception to the rule was the felling of the Twin Towers on ‘9/11’. The FTSE100 fell almost 12% over the subsequent fortnight. This sell off was a knee jerk reaction to the fear of the unknown. Once we were all sure this was a single, unique event, markets recovered very quickly and the FTSE100 was back up to the same level prior to the attack within the next fortnight.
Therefore, perhaps financial markets are more efficient than perhaps we give them credit for and markets treat these despicable events as ‘blips’ in a longer term backdrop. What affects markets most are economic factors such as economic growth, (un)employment and inflation, not external one-offs. If these attacks do not have a lasting effect on stocks and shares valuations, what does? It could be argued that financial markets are financial markets worst enemy. If we look back at previous recessions these have largely be created by financial markets themselves creating bubbles – the Great Depression, the dot.com boom, the Asia Crisis, the Global Financial Crisis.
In 1593, botanist Carolus Clusius brought tulips back to Holland from Constantinople, planting them in his garden. These unusual flowers got noticed by neighbours, but he refused to share or sell. The locals therefore simply broke into his garden and stole them to sell and make a quick florin. The demand of these tulip bulbs outstripped supply and so the Tulip Wars ensued. Arguably, the first commodity ‘bubble’. In 1636 a tonne of cheese cost 120 florins, a single Viceroy tulip bulb cost 2,500 florins – or 20 tonnes of cheese.
Demand fervour outstripping supply. Needless to say, the price of tulips fell dramatically as merchants transported more and more to Europe to meet demand only for the fad to dwindle.
Since the Tulip Wars every boom/bust cycle has followed a similar pattern. It’s a characteristic of human nature, we follow the herd, we try to keep up with the Jones’s, we’re greedy.
Sensible investing should always have a ‘buy and hold’ mentality. Understand the risk you wish to take, ensure your investment portfolio reflects your expected risk, buy the assets and hold on to them until something significant changes e.g having children, retirement etc. The portfolio needs reviewing regularly. Certain assets increase at a faster rate than others and the asset allocation can become skewed and the risk profile of the portfolio changes Also characteristics of investments can change over time and need to be readdressed.
Fight against human nature and knee jerk reactions by not following the herd, it will only create inflated prices and increases the likelihood of potential losses. Invest in assets which can benefit from long term growth and assets which markets believe will increase in value given positive economic fundamentals and good balance sheets.
Try and ignore all the ‘white noise’, the misinformation. Most of all try and ignore the terrorists, financial markets do.