23 years on, what lessons did 9/11 leave for the markets?

Twenty-three years have passed since the attack on the World Trade Center towers in New York and the economic and stock market impact, it seems, is no longer even visible on analysts’ charts. However, it was an event that reverberated around the world and ended with the declaration of war on terrorism by then President Bush Jr. on September 20, 2001, marking a turning point. But while the attacks had a profound impact on global politics, security and military strategies, The economic and market repercussions were different. Given the apparent amnesia regarding money, it would therefore be interesting to analyse the distance between violent external events and financial markets.

In this regard, studies by the University of Siena on the economic impact of the attacks of September 11, 2001 (9/11) show how it affected growth, employment, public spending and tax revenues. What do they say?

9/11: the economic effects

On the one hand, the attacks caused a 0.5% drop in US GDP and the loss of 600,000 jobs, mainly in financial services, hotels and air transport (between 75,000 and 100,000 in New York alone). Unemployment rose significantly and the recession worsened, although GDP had begun to recover in early 2002.

On the other hand, they left New York City with a long-term debt of $2.1 billion, increased health care, pension and security costs, and a drop in tax revenues of $926 million in 2002 and $1.6 billion in 2003. In addition, destruction and damage to office space amounted to $30 billion, affecting 28 million square meters of prime office space, and the city’s gross revenues fell by $11.5 billion in the months following the attacks, further damaging New York’s economy.

While the Bush administration provided financial aid to support recovery efforts, the economic decline worsened as New York City businesses and industries struggled to regain their footing. As for New York’s fiscal accounts, Tax pressures rose sharply after 9/11, with personal income tax rates reaching levels not seen since the 1960s. The tax increases were necessary to offset budget deficits caused by the direct impact of the attack on businesses, property and overall economic productivity, they say.

Regarding the impact on public services, the number of Medicaid beneficiaries increased by 25% due to emergency aid, which meant additional costs of US$130 million, while the cost of victims’ pensions and increased spending on security added to the city’s budgetary difficulties.

In addition, the reconstruction of New York City made economic recovery slow: lThe local economy took more than 20 months to stabilise after the attackseven as GDP growth resumed at the national level. “However, when we look at the long-term economic consequences, we see that US GDP growth already started to recover in the last quarter of 2001,” notes John Plassard, chief economist at Swiss bank Mirabaud.

9/11: The Impact on Global Markets

It is worth noting that the attacks also had a significant impact on foreign markets linked to the US, with a significant slowdown in growth in 12 “partner” countries as global markets experienced a drop in confidence, aggravating the overall economic slowdown.

But beyond 9/11, Plassard points out that Geopolitical risks can impact economies in a number of ways, including lower consumer and business confidence, which affects spending, investment and GDP growth. On the one hand, in times of war, as the US Department of Homeland Security points out, the destruction of infrastructure has an immediate negative impact on growth, although subsequent reconstruction efforts can boost GDP in the long term. On the other hand, countries that trade with those affected by geopolitical events may experience disruptions in import and export flows, which impacts their own economies. And commodity prices, especially oil, often react to geopolitical tensions by disrupting supply, but this usually happens in the short term.

But “Financial markets generally react to geopolitical risks through volatility in equity markets, both in the countries directly affected and globally.as investor confidence fluctuates. The currencies of affected countries may depreciate as uncertainty increases, reflecting a lower investor appetite,” explains Plassard, who adds that Historical peaks in the geopolitical risk index typically correlate with moderate declines in the S&P 500 index, with an average drop of 10% during major events.

The other factors at play

It is worth noting that a geopolitical event is always associated with other factors. “By disassociating ourselves from the event (which is obviously the most difficult), it is essential to consider other economic factors that influence market profitability, in addition to geopolitical risks”argues the Mirabaud economist. For example, the Gulf War coincided with a US recession, and the US-Iraq war of 2003 took place after the tech crash. “The recent conflict in Israel occurred when US Treasury bond yields reached their highest levels since 2007, influenced by expectations of higher inflation and economic growth, as well as by concerns about the US budget deficit,” says Plassard. It is worth remembering that in cases where markets continued to decline a year later, there were other economic crises at play, such as the tech crash after 9/11 and the banking crisis that followed the war in Afghanistan.

Geopolitics and the impact on the stock market

Geopolitical events often cause great uncertainty among investors. However, AMP’s 80-year analysis of geopolitical events and their impact on the stock market (S&P 500) shows that the negative impact is small and short-lived. On average, the stock market loses 4.6% in the 20 days following a political event, and the recovery from this decline is already complete after a period of 43 days after the event.Plassard explains. Given the limited influence of geopolitical events on the stock markets, the assessment of the fundamental situation is much more important, and that is why the economic slowdown causes nervousness and triggers greater price fluctuations.

“Depending on the market situation, investors give more weight to positive or negative indicators and position themselves accordingly. If opinions change quickly, an environment of greater volatility is created.”says the economist, adding that the impact of geopolitical events on equity markets can be brief or prolonged, depending on the nature of the event. “Despite the initial negative effects, historical data shows that US equity markets typically recover within a year, with an average gain of 15% following major geopolitical shocks.”says Plassard.

In conclusion, looking beyond the “event” one can see that, in purely economic and stock market terms, September 11, 2001 is no longer relevant and has left no trace; quite the opposite of what happened on a human and geopolitical level.