The Investment U E-Letter: Issue # 450
Thursday, July 7, 2005 Why the London Attacks Were Terrible, But Your Investments Are Fine…
What History Tells Us about the Stock Market When National Security Is Threatened
by Dr. Steve Sjuggerud, Chairman, Investment U
When I turned on the TV this morning, I was appalled seeing the terrorist attacks in London. While it's truly an awful thing, by now, the financial markets are getting used to it… The usual happened… Stocks fell, gold was up, and U.S. Treasury bonds rose as investors looked for a flight to safety. Then things calmed down, and the markets did too. It's been the pattern. While the news of the London attacks today was terrible, looking back at the patterns over 100 years of financial history, your investments will most likely turn out just fine. On September 12, 2001, I released a major report to my readers titled, "What Happens When National Security is Threatened." In it, I said: "We only have a few instances from this century to draw from. But the almost unanimous answer is this: - Stock markets fall at first, in shock, and mass uncertainty sets in.
- Then, the uncertainty is resolved, and stock markets roar higher than where they began."
I looked back at the major moments when national security was threatened… Specifically, I analyzed the following: - World War I (both when it began in 1914 and when we entered in 1917)
- World War II (both when Hitler took France and when Japan bombed Pearl Harbor)
- The Korean War as it began
- The Cuban Missile Crisis
- The Gulf War… you get the idea.
I found the pattern was clear. I said: "Markets bounce back… with remarkable gusto. The pattern is: a sell-off as the news breaks, a (generally short) period of uncertainty, and then (generally) a remarkable rally as the uncertainty is removed." After I studied the typical investments, I then looked at how commodity prices (like oil) react to threats to national security. I sized up the major U.S. events, and the major Middle East events, like the Iran-Iraq battles of 1978-1980. I found: "When national security is threatened, history suggests that oil prices only rise if the opponent poses a threat to the world supply of oil. If the world supply of oil is not at risk, the price of oil is not at risk." "Based on limited evidence, it seems clear that oil prices rise when the supply of oil is threatened in particular, not our national security." Train bombings in London do not affect the world supply of oil. So a fall in the price of oil wasn't a surprise today. Based on the conclusions I came to and reported to my subscribers on September 12, 2001, I'd like to close today with the same thought I had back then: "Let's hope this time is no different than the others - a short period of uncertainty followed by a remarkable rally after the uncertainty is removed." With my thoughts on the people of London, instead of stocks, that's it for today. Good investing, Steve Related Articles Investment U Archives
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