ON WEDNESDAY London share prices opened at their highest for three years, with the FTSE 100 index above 5,200. Then came the decision in Singapore to award London the 2012 Olympic Games. National euphoria spread to the stock market, albeit in a modest, rational way. Stocks that might benefit from preparations, such as property and construction groups, put on a per cent or two, giving the index a little fillip. But there were no exaggerated gains.

But 24 hours later sentiment was reversed dramatically as terrorist bombs horribly murdered innocent travellers in London. Most workers in financial markets had already arrived safely. The material damage was limited to transport disruption, but the toll on human life, human suffering and human minds was great and possibly enduring.

Hope instantly turned to fear. The issue for investors is whether fear will have any lasting impact on the economy.

Within a short time of the first news of the bombs, the FTSE 100 was down more than 200 points, almost back to 5,200. Within a few hours, however, half of those losses had been recovered. The rational losers are companies that depend on travel and tourism, London retailers, cinemas, theatres and clubs. The markets were no more hysterical about death in their back yard than about the Olympics.

Short-term losses are inevitable after such shocks. Buyers are either preoccupied or too uncertain to buy until the consequences become clearer. There are always forced sellers, so prices fall. Then bargain-hunting speculators tastelessly, but profitably, move in.

History suggests that non-economic shocks have only a very short-term impact on asset prices in general, as opposed to the stocks of companies directly affected. In the early 1990s, the City of London took two IRA bomb outrages in its stride. In both cases, loss of life was limited but loss of property heavy. In October 1987, much of the City was shut down on a Friday by the great gale that devastated woodland and street trees across southern England. On the Monday, prices crashed as London caught up with falls on Wall Street. It triggered one of the most alarming stock market corrections of the century, but the impetus came from New York and ultimately from currency markets, not from the storm.

On September 11, 2001, terrorists bombed New York’s twin towers out of a clear blue sky. Thousands were killed, Wall Street was heavily disrupted for a week. When markets reopened, prices crashed over fears that the psychological damage would send a country that was already suffering from the bursting of the dot-com bubble spiralling into deep recession.

This did not happen. It was a disaster for airlines, hotels and car hire companies, but only long-distance travel was badly affected. New Yorkers rallied defiantly and, if anything, shortened the period of low economic confidence.Looking at the episode in retrospect, the 9/11 market plunge lasted only a few weeks, followed by a false rally for a few more weeks. Share prices then resumed the decline they had been suffering already, almost as if the mood-changing cataclysm had not happened.

A terrorist attack, war or political event that caused oil prices to surge could have a lasting impact on economic prospects and share prices, as in 1973. Murder, even mass indiscriminate murder, should not affect the economy or the general level of share prices.

Companies not directly affected by a reluctance to travel, drink or shop in exposed places still look much better value than when the FTSE 100 last stood at this level. In summer 2002 they traded on average at 23 times earnings. Today the average is 15. Interest rates, though held on Thursday, may well be cut in a month’s time, supporting share prices. Unless consumer confidence is damaged, the main danger for investors is that output growth was already slowing faster than expected. Other fundamentals have not changed.

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