Did Bin Laden’s Death Just Signal the Market’s Next Move?

Published Mon, May 2nd, 2011   Louis Basenese, Chief Investment Strategist

For almost 10 years, terror mastermind Osama bin Laden evaded us.

Not only that, he tormented us with regular video and audio missives, calling for more bloodshed. He kept fear alive.

But late on Sunday night, patience paid off, as we learned that U.S. forces had put a permanent end to bin Laden’s reign of terrorist plotting, killing him during a battle near the Pakistani city of Islamabad.

Considering that 2,977 people died in the September 11 attacks and the disaster directly impacted so many on Wall Street, it’s not surprising that the stock market and the U.S. dollar are rallying on the news.

But can it last?

No More Bin Laden… Now What?

We can look to the capture of a similarly evil man – Saddam Hussein – for clues about where stocks and the U.S. dollar might head next. It’s not a perfect proxy, mind you. But it’s the closet thing we’ve got.

As it turns out, news of Hussein’s capture also broke on a Sunday and lifted stocks when the market opened on Monday, December 15, 2003.

By the end of the day, though, the S&P 500 had traded back down to where it started, before staging a modest rally over the next couple of months.

Looking at the U.S. dollar, it also enjoyed an immediate bounce. But as BBC News reported in 2003, “It slid again, as currency traders’ attention returned to the heavy U.S. trade and government deficits.” And those concerns continued to weigh on the dollar in the three months following Hussein’s capture.

Fast forward to today and the immediate price action is similar…

Déjà Vu All Over Again? Not So Fast…

When the market opened this morning, stocks popped, but then started giving back gains by midday. Meanwhile, the U.S. dollar index traded above $73 overnight before it gave back its gains, too.

Be careful.

Although the immediate market reaction is strikingly similar, it doesn’t mean the price action over the next three months will be the same, too.

Sure, the death of bin Laden is a psychological game-changer. It’s a reason to feel better about our national security, our country and, in turn, our stock market. Or as Jim O’Neill, Chairman of Goldman Sachs Asset Management, said, “The immediate consequences are… a positive repricing of the U.S. and its markets.”

But after almost 10 years, I’m not sure how much of a “terror discount” is still baked into stock prices. Certainly not enough to fuel a prolonged rally. Especially since bin Laden’s death doesn’t put an end to terrorism entirely.

It’s (Still) About the Fundamentals

Of course, as monumental as bin Laden’s death is, it does nothing to change the economic landscape.

We’re still contending with stubbornly high unemployment, a double-dip in residential real estate prices, ballooning government debts, massive budget deficits… the list goes on.

Plus, we’re about to be inundated with economic statistics this week. Data like manufacturing figures, oil inventories, productivity levels, unemployment, auto sales and consumer credit.

In the end, the strength (or weakness) of these fundamental economic indicators promises to carry the most weight in determining where stocks and the U.S. dollar head over the next couple of months.

That said, if the death of bin Laden inspires a rally – even for the briefest moment – embrace it. The news serves as a bookend to one of the worst tragedies in American history.

It’s about closure, healing and, most important of all, justice – delayed, but finally delivered.

Ahead of the tape,

Louis Basenese