The deadly bombings in London on Thursday rattled financial markets around the world, but the impact was short-lived, suggesting that to some extent investors have come to accept terror attacks as inevitable, analysts said.
In the United States, the three major stock indicators recovered from early-morning losses to post modest gains for the day. European stock markets, operating close to the scene of the deadly attacks, also mounted a comeback, cutting their early losses by more than half.
The speed of the turnaround left some market observers breathless. They recalled that it took about a week for U.S. stocks to bounce back from the Madrid rail bombings in March 2004.
"The psychology is kind of scary," said Phil Flynn, an energy analyst for Chicago-based Alaron Trading Corp.
"We are learning to take terror incidents in stride," Flynn said. "We aren't shocked when people on their way to work are blown up."
This might sound like a chilling reaction, but it demonstrates what investors have learned from past terror attacks: that while the emotional toll of terrorism is huge, the economic disruption can be limited. The most vulnerable parts of the economy are the airline, travel and insurance industries because of fears of more attacks.
"When you look through the shock of it, I don't think this is a market-changing event," said Alfred Kugel, chief investment strategist at Atlantic Trust, formerly Stein Roe Investment Counsel.
Investor behavior is affected by countless factors, but there is a truism that the markets don't like uncertainty, and the bombings, seen immediately as being linked to elements of Al Qaeda, could have set off a panic. Indeed, the initial reaction was dramatic. Stocks in Europe plummeted as investors fled to safe-haven assets like government bonds and gold.
But then came the second, unexpected reaction, in which the markets seemed to shrug off the violence.
"When trauma becomes multiple and a common occurrence, people have less of a dramatic or extreme response," said Dr. David Feinberg, medical director of the University of California at Los Angeles Neuropsychiatric Hospital, who also holds a master's degree in business administration.
In London, the FTSE 100 index shed more than 200 points, or about 4 percent, before rallying. It finished the day off 1.4 percent, declining 71.30 points to 5,158.30.
In Frankfurt, the Dax closed down 1.9 percent at 4,530.18, after touching a low on the day of 4,444.94. France's CAC 40 index ended down 1.4 percent at 4,220.62 after a low of 4,089.27. Some analysts surmised that the markets already had built in the expectation of future terror attacks.
Wall Street had more time
On Wall Street, the reaction was more muted as investors had a few hours to digest the news of the bombings before the 8:30 a.m. opening bell on the New York Stock Exchange.
In the first hour of trading, the Dow Jones industrial average slid more than 103 points, or 1 percent, but that would be as far as the index would fall.
Anticipating opening-bell jitters, Timothy Swanson, chief investment officer at National City Corp., sent a note to clients before the markets opened suggesting that they consider buying stocks Thursday.
"The reality is we live in a world where stuff like this happens," Swanson said. "The valuation of securities shouldn't be meaningfully different today than they were yesterday. I suggested taking a contrarian stance."
Contrarians at an advantage
. That advice might have paid off. The Dow rebounded in the afternoon to close up 31.61 points at 10,302.29. The other two broad stock indicators also recovered to post gains for the day The Nasdaq composite index rose 7.01, or 0.34 percent, to 2075.66, while the Standard & Poor's 500 index was up 2.93, or 0.25 percent, at 1197.87.
The volatility extended across other markets. Early in the day, the price of the Treasury's 10-year note rose more than a point and the yield, which moves in the opposite direction, fell as low as 3.93 percent. But in the afternoon, the yield moved back to 4.06 percent, down from 4.07 percent Wednesday.
The dollar hit a 14-month high against the British pound after the explosions, but fell against the euro and was mixed against other major currencies.
Fears of an economic slowdown, particularly in tourism, caused oil prices to plummet by nearly $5 from its intraday high above $62 to $57.20 a barrel in electronic trade immediately after the attacks. But as analysts digested the incident's probable impact, August light sweet crude futures recovered to finish the day at $60.73, a decline of 55 cents.
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