“It was a great day for America,” proclaimed President Obama in a press conference referring to the killing of Osama Bin Laden. I don’t think many could argue with that. What is less certain is the impact it will have on the stock market if any. The futures in the morning were certainly on fire, but those gains evaporated throughout the day and stocks finished in the red. Is this a nonevent for stocks?
In a vacuum, this news would be positive for stocks since it would lower the perceived risk premium embedded in stocks. The risk premium is the amount in excess of the risk free rate (U.S. treasuries) that stocks are expected to earn. When the riskiness of stocks go up for whatever reason, so does the risk premium and the valuation of stocks should go down. Basically, the higher the risk premium, the lower valuations should be and thus the lower stocks should be and vice versa.
However, did things really get safer with the death of Bin Laden? I am not sure anybody really knows that because in the short run at least, the threat of retaliation could increase which would actually raise the risk premium. Most believe that longer term, this definitely makes the world a safer place, so we will see if that has an impact on stocks.
Back in the late 1990′s, a book came out proclaiming that the Dow should be at 36,000 because there really was no risk premium embedded into stocks and that they were not more risky than bonds. That of course was not true and the book was laughed at by almost all on Wall Street, but it was a sign of the times when stocks soared through the roof year after year.
Of course, the world is not in a vacuum, so there are literally millions of other factors at work. The death of Bin Laden is one event out of so many other cross currents. If it can be proven that geopolitical pressures are lessening, than I think investors will reward stocks with higher valuations, but this one event isn’t enough conclusive evidence yet. Stay tuned.
Will OBL’s Demise Juice The Bulls? is an article from: 
