×

How Paris attacks will play out in the market

October's surge has become November's purge. After trading above the 2100 level during the first three days of the month, the S&P 500 has headed south ever since. Last week, the selloff picked up speed, notching two decline days in excess of 1 percent. Downside price volatility and the month of November are typically not synonymous in investors' minds.

Indeed, since 1950, the frequency of days in which the S&P 500 fell by 1 percent or more ranked November only 7th, with August and October coming in at Nos. 1 and 2, respectively. December, however, posted the lowest frequency of days that saw declines over 1 percent.

A trader works on the floor of the New York Stock Exchange.
Getty Images
A trader works on the floor of the New York Stock Exchange.

In the week just passed, the S&P Composite 1500 (consisting of the S&P 500, MidCap 400 and SmallCap 600) declined 3.7 percent, with all three cap-size components recording in the red. What's more, nine of its 10 sectors declined on the week, led by Information Technology. Only Utilities closed higher on the week.

Not a factor in last week's swift selloff was the response to the terrorist attacks in Paris, which will likely further dampen investors' spirits and may add some velocity to the current slide in global equity prices. As a result, the wall of worry has been elevated. Investors are already concerned about the Federal Reserve beginning its rate-tightening program in December. Not just because the fed-funds rate may be raised by a quarter of a percent, but because the Fed may already be behind the curve, due to the stronger-than-expected reading in third-quarter GDP and the surprisingly favorable October jobs report and pickup in wages.


As a result, the concern now is that the Fed will have to become more aggressive, which could increase the possibility of tipping the U.S. into recession. Now, add a negative reaction to investor psychology from the terrorist actions in Paris, and you come up with a scenario that is similar to pushing on an already accelerating snowball.

In response to the attacks in Paris, we think gold and safe-haven currencies, like the U.S. dollar, Swiss franc, and Japanese yen, will likely strengthen. In turn, we see a weaker euro. Oil and energy stocks might also firm, as the terrorist actions re-introduce supply uncertainty into the energy equation. Defense stocks should get a pop, while airlines and travel & leisure stocks likely sag. Yet because we don't see these terrorist actions causing substantially more weakness to the global economy, we believe any share price decline will be short-lived, as was the case following most market shocks since WWII, in general, and terrorist actions, in particular.

Following selected market shocks since WWII, the S&P 500 experienced an average one-day decline of slightly more than in 2 percent, and fell nearly 6 percent before bottoming 11 days later. The market got back to break-even in less than a month, however, after investors concluded that most shocks would not result in recession. What's more, market responses after bombings and shootings, while more abhorrent than acts of nature, caused the market to fall even less on average, as well as bottom sooner and recover faster than otherwise was the case.

So there you have it. The market thus far in November has been undergoing an uncomfortable digestion of the unhealthy rapid overindulgence experienced in October. It now has to contend with the uncertainty surrounding the aftermath of the Paris terror attacks. History says, but does not guarantee, that market weakness following such horrible events is typically short lived and advises investors not to add remorse over selling equities into this weakness to the grief we are now experiencing over the loss of innocent life.

Commentary by Sam Stovall, U.S. equity strategist, S&P Capital IQ and and author of "The Seven Rules of Wall Street." Follow him on Twitter @StovallSPCAPIQ