Terror Risk Burden

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Last week we solemnly remembered the tragic day of September 11, 2001, and for New York area residents, the pain still runs deep. However, as we reopen ourselves to those haunting memories, we cannot help but feel more than just comfort from the fact that no significant terrorist act has occurred on American soil since.

As time has passed, the wound has healed, and completely so for our securities markets. Still, we were not always so calm and comfortable, as you will recall. 9/11 served as a wake up call to Wall Street, as well as to Main Street. After years of enjoying safe days and restful nights with our blue jeans and apple pie, the events of 9/11 brought terrorism, and the fear of it, home. Where previously our only concern was getting to work on time, it was replaced with serious worry about just making through the workday.

Make no mistake about it, with the hit against us striking so close to the stock exchange at Wall and Broad, investment professionals took special note, and the securities they traded took a deeper hit than seen in securities prices in the days that followed. A new reality was engineered, and included the threat of serious economic impact born from terrorism. A "terror risk burden" was built into stocks, and as Homeland Security warning codes turned from green to orange to yellow and red, so also did stocks bear the cost of a new risk factor.

Greeks are also now getting to know the economic cost of unrest and terrorism intimately. When street riots broke out last year in Athens after a policeman killed a teenager, it did not go any less unnoticed by the Athens Stock Exchange than it did by the general populace. And last week, when a car bomb blew up outside the Athens bourse, the Athens Composite Share Price Index reflected the impact. Still, the damage caused by that specific attack was relatively light, and stocks recovered minor losses swiftly.

Back here in the states, the market has all but forgotten what it was like on September 12, 13, 14...etc. We arrived only as close as a mile to our offices in Downtown Manhattan via public transit, and had to walk the rest of the distance. At our door, instead of the usual tobacco addicted gang to greet us, we found machine gun toting, armor clad National Reserve men (later replaced by policemen). While they were stationed there for our protection, believe you me, they did not make us feel safe at all. Our vulnerability seemed only more brightly highlighted by their presence, not to mention the stare downs.

But eight years later, things have changed somewhat. People are forgetting what evil is possible within our midst, and complacency is creeping its way back into individual behavior and stocks as well. Still the return of that risk burden or penalty is as inevitable as the risk of another terrorist act. It is going to happen again someday, in some manner; and when it does, stocks will once again raise the red flag of fear and retrench until that war is over as well. When that time comes, investors will be well served to consider the long-term significance of it, rather than to react only in panic. We must evaluate with level heads whether or not another new paradigm has been presented us, and how we should properly incorporate it into the forecast for our economy and the value of our portfolios. May that day never come, but may God protect us when it does.


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