Remarkably, global stock markets continue to shrug off the London terrorist attack. Markets have proven resilient since the terror war started on September 11, 2001, but this time around they shrugged fast -- and big.
Stock markets in Britain, France, and Germany hit three-year highs in recent days. The U.S. S&P 500 stock index reached a four-year high. The mid-cap S&P 400 and the small-cap Russell 2000 climbed to all-time historic highs, as did the transportation index and the New York Stock Exchange index.
Following the 9/11 terrorist attack on the U.S., it took the S&P two years to recover its pre-attack level. After the Madrid train station bombings in 2004, it took stocks 14 sessions to recover. But after the London attack, it took only one day for markets to rebound, with substantial gains coming on the following two days.
I have long believed that stock indexes reflect the health, wealth, and security of individual nations. That explains why stock markets are standing tough in the face of al Qaeda’s latest attack. Worldwide investors are telling the enemy they have long-term confidence that the war on terror will be won, just as they believe in the resiliency and flexibility of free-market economies and the outlook for pro-growth policies, which are in action across nations.
Ben Bernanke, the former Fed governor and new chairman of the Council of Economic Advisors, told a Washington group that “We are in the midst of a healthy and sustainable economic expansion.” He’s got that dead right. Besides rising share prices, appreciating real estate and declining unemployment are boosting family wealth and incomes, allowing consumers to withstand higher energy prices. Meanwhile, sales at stores open at least a year are surging at better than 5 percent; corporate profits, which are the lifeblood of business expansion and investor class wealth, have soared to record shares of gross domestic product; and recent surveys by the Institute for Supply Management show both the manufacturing and service economies to be strong.
Though President Bush’s critics will never admit it, his supply-side tax reforms of two years ago are working brilliantly. With new incentives to work and invest, the economy is expanding, the income base is widening, and businesses and individuals are producing an unprecedented surge of tax collections. All this is occurring at lower marginal tax rates. Once again, the Laffer curve is working.