Stocks Set New Record Highs
Stocks were up for the third week in a row, posting record highs on better-than- expected earnings results and solid domestic economic data. Since the bottom of the post-British referendum selloff, the S&P 500 has gained 8.06%. For the week, the S&P 500 gained 1.49%, the Dow grew 2.04%, Corporate Bonds fell 0.86%, and International Stocks grew 3.65%.
Despite the upbeat data, violence continues to threaten markets around the world. On Sunday, three police officers were killed in Baton Rouge, Louisiana. On Thursday, a terrorist drove through hundreds of people in Nice, France, killing at least 84. A thwarted coup by Turkey's military on Friday resulted in hundreds of deaths and could lead to political instability after the president rounded up thousands of suspected plotters.
The human cost of violence is incalculable and its effects will be felt by victims for many years to come; however, the effect on markets and economies is measurable. It may seem unusual to attempt to calculate the cost of terror in dollars and cents, but we should remember that one of the goals of terrorism is to cause financial as well as physical damage.
Some estimates show that 9/11, the largest terrorist attack on U.S. soil, reduced U.S. economic growth by half a percentage point. However, the S&P 500 regained its lost ground within a month. In 2005, when terrorists attacked the London tube, the UK market fell sharply, but recovered within days. The British economy actually rose 0.8% that quarter. Tourist destinations often suffer more from terrorist attacks because they depend on visitors who may choose safer locations.
The effect of terrorism on global financial markets is often limited. But with markets at record highs, it's possible that we could see a pullback from overbought conditions as investors sell first and ask questions later. However, the current rally is broad-based and is built on solid fundamentals: June hiring data was strong, retail sales are sharply up, and early reads on corporate profits are favorable.
While no one knows whether markets will react negatively to renewed security fears, history indicates that markets are quite resilient to violence. Past performance is no guarantee for future results, of course, but it is not likely that individual attacks are enough to push stocks into a correction. However, headline risk from developing security situations is real.
Though markets reached new highs last week, we should expect continued volatility in the weeks to come, especially as we move into the typically difficult third quarter of the year. While domestic data is positive, there are plenty of headwinds to give investors pause. Keeping an even keel during both the highs and lows is key to successful long-term investing. As always, we'll keep you updated.