NEW YORK — The Sept. 11, 2001, terrorist attacks and other high-profile terrorist acts were followed by stock market rallies that "more than make up for the negative market performance during the reaction periods" and tended to also outperform bonds, "demonstrating the market's resiliency" to the horrific events, according to a report, "September 11 — Five Years Later: An Investment Perspective," by Bob Doll, president and CIO of Merrill Lynch Investment Managers.
Six months after the 9/11 attacks, the S&P 500 index returned 20.3%, following an 11.56% drop in the 10 days after the attacks, according to the report. Stock markets also reacted similarly after other high-profile terrorist acts in the decade before 9/11 and the five years since, he noted. For example, in the six months following a 2002 bombing in Bali, Indonesia, the Jakarta composite index rose 20.9%, after falling 10.36% in the two days after the attack. In the six months following the 2004 Madrid bombings, the IBEX 35 index rose 6.59%, after falling 7.16% in the four days after the attacks. In the six months after the 2005 London bombings, the FTSE 100 index rose 12.86% after falling 1.36% the day of the incident.
But the attacks — along with "the recession during the early part of this decade and the severe bear market" that ended in October 2002 — have also contributed to an increase in the equity risk premium, he wrote. The S&P 500 price-to-earnings ratio has fallen to the high teens today from the high 20s in October 2002, even though "corporate earnings have been extremely robust (currently on a remarkable 12-quarter pace of double-digit growth levels), while stock prices have provided decent, albeit unspectacular, returns," according to the report. "In our view, one of the factors contributing to lower p/e ratios is that there is a higher level of ‘risk premium' built into stock prices, resulting in the relative lower level of stock prices compared to earnings."