Bin Laden’s Dead, So What Happened to the Stock Market Rally?

The killing of Al Qaeda leader Usama bin Laden is undoubtedly a huge positive for America and President Barack Obama, but the victory’s impact on the red-hot stock market is far murkier.

In the short-term, the death of the leader of Al Qaeda represents a significant psychological shot in the arm for the U.S. and consumer sentiment that is likely to be bullish for equities.

The big-picture impact may be more neutral or even negative because bin Laden’s death could trigger retaliatory terrorist attacks, does little to fix underlying problems in the U.S. like scary deficits and clearly increases the odds Obama stays in office beyond 2012 – a bearish factor, according to at least some market watchers.

The knee-jerk reaction late Sunday on Wall Street to the news of bin Laden’s death was upbeat as Dow Jones Industrial Average futures soared more than 100 points, crude oil declined and the U.S. dollar rallied. Yet the initial enthusiasm quickly faded and all three metrics closed Monday largely unchanged.

More Ammo for the Bulls?

Still, many see the dramatic achievements only helping stocks in the next several weeks.

“I think it’s very bullish for stock prices,” said Jim Rickards, senior managing director for market intelligence at Omnis. “The impact is mostly psychological, but psychology is important. Everything the Fed has been doing the past couple of years has been about improving the psychology.”

Wall Street had already been on a tear, with the blue chips surging 305 points, or 2.44%, last week to land at their best level since May 2008. The benchmark index leaped almost 4% in April and has rallied five straight months and 20 of the last 26.

“The markets tend to rally around any patriotic event. We're in that sweet spot, really,” said Marc Pado, U.S. market strategist at Cantor Fitzgerald.

Analysts at JPMorgan Chase said Sunday’s news only bolsters their call last week for the S&P 500 to climb to 1475 by the year’s end, up from their earlier call of 1425 and 8.4% above Monday’s close of 1361.22.

Bin Laden’s death “will have durable positive effects on equity markets, persuading investors to diminish fears on global security (a strong case to be made that the war on terror is over), leading to lower equity risk premiums (read P/E of stocks go up),” Thomas Lee, JPMorgan’s chief U.S. equity strategist, wrote in a note.

Lee predicted an increase in equity inflows, which have already soared by $30 billion so far in 2011 the most out of any asset class, but below pre-2008 levels. Consumer confidence is also set to rise, Lee wrote, likely leading to an increase in borrowing that could help banks like Citigroup (NYSE:C) and Wells Fargo (NYSE:WFC).

Others point to the markets’ fizzle on Monday as evidence the military victory is just that.

“I don’t think this is a big market factor,” billionaire investor Warren Buffett told FOX Business. “The American people feel wonderful today, but in terms of the earning power of American business, I don’t think that factor should change dramatically because of this.”

Peter Kenny, managing director at Knight Capital Group, echoed that sentiment. “Yes, he was an incredibly important person in the global jihad, but he’s just one person,” said Kenny. “I don’t think it’s going to have the impact that many people are hoping for, meaning risk will be off the table.”

Politics, Threat of Reprisals Cloud Big Picture

Risk is certainly a factor in the bigger picture because some analysts have warned Al Qaeda and its splinter groups may attempt to avenge bin Laden’s death via a spectacular terrorist strike like the September 11 attacks or the London bombings.

Worries about a future terrorist event can weigh on consumer confidence and an actual disaster could spark another recession.

“I think people will be looking over their shoulders worried about some retaliatory attack,” said Nick Kalivas, vice president of financial research at MF Global. “That might provide some balance to a pickup in confidence over the leadership in Washington.”

Rickards downplays the threat of a reprisal because Al Qaeda has not carried out a speculator attack in either the U.S. or Europe in many years.

“They may want revenge, but that doesn’t meant they are capable of pulling it off,” said Rickards. "If they were, why didn’t they do it already?”

In any case, the direction of stock prices is likely to be influenced by the 2012 presidential election, which seems to skew more in Obama’s favor than just a few days ago. Political analysts have predicted Obama’s approval rating will see a bump, as did those of his predecessors.

“This event keeps him from looking like he’s Jimmy Carter, but he’s still got a ways to go to prove his economic policies,” said Kalivas.

Many on Wall Street would view Obama’s reelection as a negative for equity markets because of the perception his policies favor higher taxes, increased regulation and unions.

“What I hear from talking to Wall Streeters, hedge fund owners and CEOs, is that Obama has, in effect, created a negative business climate,” said Rickards.

Yet under Obama, the stock market is in the midst of one of its greatest bull runs ever, with the blue chips surging close to 4,000 points since he took office in January 2009. The Dow has rocketed 95% since tumbling to a 12-year low close of 6547 in March 2009. It’s hard to argue Obama can’t take at least some credit for that rise.

The problem is the killing of bin Laden does not solve the long-term issues impacting the U.S., such as the devaluation of the greenback and inability to fix the country’s bloated balance sheet.

“Three to six months from now it’s going to be in the history books and we’re going to be back confronting all of the problems we were Sunday morning,” said Rickards.