New York, Madrid, now London. Savage violence once again fails to keep the financial system down. But don't confuse resilience with immunity. By Rik Kirkland
By Rik Kirkland

(FORTUNE Magazine) – IT'S TIME TO ADD ANOTHER PIECE OF LORE TO THE LESSONS of 9/11. In the immediate wake of that epochal terrorist assault, FORTUNE peered into an uncertain future and ventured that for a long time to come an essential tension would play out in our economy--"the tension between its resiliency and its fragility." Four years on, buoyed by the markets' impressively rapid rebound from the horrific July 7 bombings in London, there's a new near consensus among the financial commentariat: Resilience tends to trump fragility every time.

Here's a sampling of opinion from the day after. "Investors, to a large extent, have become immune to terrorist attacks," said Hugh Johnson, chief investment officer at Johnson Illington Advisors, in the New York Times. "Markets," agreed Joseph Quinlan, a strategist for Bank of America, in a note to clients, "have largely priced in this type of risk." Rushing back home from the London Olympic Committee's all-too-brief moment of triumph in Singapore, Sir Martin Sorrell, CEO of advertising giant WPP, hailed his countrymen's determination to "carry on" and told FORTUNE: "Recovery from these shocks to the system tends to be quick and significant."

What's really happened is that, in the post-9/11 world, vicious terrorist attacks on ordinary people have sadly become another "exogenous event." That's a useful mouthful of jargon that financial types deploy to distinguish between unexpected outside shocks--wars, hurricanes, oil embargoes--and the internal forces that normally drive markets, such as the direction of earnings and interest rates. Sometimes recurring exogenous events cross the line and become internalized into the market's prediction machine. Example: The fear of damage wrought by $60 oil has faded, and people today say things like "The market has already discounted $60 dollar oil." Similarly, when terrorist acts high in human costs but low in lasting economic effects repeat themselves sporadically, markets cold-bloodedly learn to get over their initial panic faster. What took at least a week after the 2004 Madrid bombings--recovering to pre-attack highs--took less than a day after London's savage strikes.

But keep three things in mind. First, a headwind's still a headwind, even if we're used to it. Compared with the months before 9/11, both the Dow and the Nasdaq remain essentially flat. Yes, that also reflects $60 oil, anxiety about a housing bubble, and the like. But a hidden terrorism tax--paid in lives, in higher frictional costs of doing business, and in greater uncertainty--is part of the reason why.

Second, since September 2001, the attacks that the markets have learned to overcome have all occurred overseas. "The U.S. stock market seems much more reactive to events within American borders than in other parts of the world," wrote Smith Barney strategist Tobias Levkovich in a prescient report right before the London bombings. Had four explosions rocked New York's transportation system in early July, we would likely have bounced back less quickly (but bounced back all the same).

Last and worst, no one is really saying the markets have priced in or would quickly recover from a truly spectacular terror- inspired shock--something capable of the kind of abiding economic damage that would otherwise arise only from more traditional government vs. government conflicts, such as a battle between the U.S. and China over Taiwan or a new global tariff war. What might those be? Like others, Robert Hormats, vice chairman of Goldman Sachs International, worries about a possible intifada-like wave of suicide bombings in Europe or the U.S. His biggest fear: a dirty bomb that renders a major piece of America's infrastructure--say, the port of Long Beach, which handles roughly a third of our shipping imports--unusable for more than a decade. "Aside from the loss of life," he says, "the spillover from such a weapon of economic mass disruption would be long-term and enormous."

Horrible to contemplate, but one of the few sure-fire lessons of 9/11 is that it's a huge mistake to avoid thinking about--and doing our best to stave off--the unthinkable. Another is this: For all the risk of apocalypse now, life tends to go on. Remember when New York was burning and the TV flickered all night, how we fretted about all the things that might be gone, never to come back--air travel, a good night's sleep, heck, even irony? Well, they came back.

Which leaves unanswered the question of where the markets go from here. If you're a bear, like Morgan Stanley economist Steve Roach, you look at rising protectionism and debt loads, record global trade imbalances, whisper-thin spreads on risky assets and conclude "the global economy is still a fairly shaky place, so don't draw a false sense of security from this predictable 'resiliency play.'" If you're a cautious bull, like Tobias Levkovich, you applaud "the new elevated risk premium" as a comforting sign of "underlying health for the equity market." Hmmm. Sounds remarkably like a world still struggling with ... how did we put it four years ago? Ah yes: "the tension between its resiliency and its fragility." We'll stick with that forecast.