Stock market and terrorist attacks question...?

Well Dog, thats always a risk that you take. I don't know what your long-term or short-term horizons are, but keep in mind that after the 9/11 attacks many stocks hit their lows just after. Some say that the chances of another terrorist attack is priced into the market. Of course, it would negatively affect things in the short term, but as a trader I can tell you if it were that easy to predict everyone would just go short right at the moment the news hit. That would be easy money and as you know, thats seldom possible! Remember, before 9/11 we were already in a deep bear market.

Interestingly enough, last night I was just looking over some old journal entries from the US market around the time of the 7/7/05 London bombings and was noticing how the US market seemed to be indifferent to the attacks, and even accelerated pace during and after. Now, the latest news is in no way comparible to 9/11 or 7/7 but the US stock market seems to be shrugging off the news just as after 7/7 with the Dow up 31.61 on 7/7/05, 146.85 on 7/8 (second trading day after-similar to today in which we were up 126.81), and 70.58 on Monday, 7/11. OK, that leaves me with several possible theories, none of which probably really scratch the surface, but here they are: 1)US market participants are indifferent to foreign happenings, even if that country happens to be our biggest ally, a huge trading partner, and arguably the financial capital of the world (doubtful from any point of view really that this theory is true) 2)the US markets didn't feel that the 7/7 attacks had any significant effect on the US economy whatsoever (fundamentally flawed-objectively and subjectively), or 3)the US markets felt that the reaction to a terrorist attack in the free world was significant, resolute, and well planned, giving way to plenty of relief buying once the dust settled. Now, all else equal, I think this theory has more chance of being true, although there are plenty of other factors beyond the scope of this discussion. Was there a flock to US equities just after the attacks as cash flowed out of the UK? Thats a factor, but the US futures the morning of 7/7 were down heavily too. The market never lies, and I think it is important to view its reaction to any event as a function of the confidence that the free world can deal with that event, whether the attacks are in New York, London, Paris, Tokyo, or Wichita for that matter. September 11 caught a lot of Americans and others by surprise, and as much as I would like to think this would never happen again anywhere in the free world, at least if there is a next time we would like to hope we would be more ready in every way possible.

Stocks tend to be volatile based upon any events that happen to the economy, so just as a 9/11, Enron, or simply a Fed rate hike can drive cyclical stocks (stocks that track with the overall market) down, catalysts such as the end of a major war, improving corporate earnings, or a Fed easing can drive them up. Also consider diversification-some stocks such as commodity based companies tend to have a negative correlation to cyclical stocks, others, such as consumer staples (food stocks, etc.) tend to show a more balanced return profile.

Bear markets will come and go, but if you are wise in your investment decisions, you will be OK. Good luck.