We saw a sharp decline in risk markets last night (S&P500 down 2.3%, CRB Index down 2.2%, JPY gained 1.9%, High Yield Bonds lost 0.6%). While some may attribute this to the Boston bombing, we believe that the sell off was due more to the effect of gold prices plunging (see chart below), resulting in margin calls on those who are still long on this asset. At the time the bombs went off at around 3pm, the S&P was already down by 1.7%, so the sell off had already started prior to this, at the bell.
Image courtesy of Stockcharts.com
While there will be a short term (days to weeks) negative effect, e.g. more caution in markets, the medium term (weeks to months) impact is neutral. Historically, terrorism events do not cause a shift in business activity. 9/11 saw the market respond with a V-shape recovery within a month. Hence it is still important to focus on the business cycle. The same can be said for margin calls, it's the business cycle that matters, not the margin calls faced by leveraged investors.
ConclusionOur recommendation is to stay invested. As such we do not advocate any change to our portfolio positions at this time.
Notwithstanding our clinical views as to the effect of the bombings on the financial markets, our thoughts and prayers do go out to those and the families who have been affected by this senseless tragedy.
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