Our Resilient Economy

The market will open on Monday, emotionally drained from a week's worth of mourning and assessing the damage. That time to think, rather than reacting with immediate panic, should provide some stability. While previous disasters have sometimes met with immediate sell-offs, the market and the economy have emerged stronger from each. They can do so this time as well.

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By Brian Lund (TMF Tardior)
September 14, 2001

"Let me assert my firm belief that the only thing we have to fear is fear itself -- nameless, unreasoning, unjustified terror, which paralyzes needed efforts to convert retreat into advance." -- Franklin D. Roosevelt, referring to economic conditions in the Great Depression.

It's difficult to imagine the effort it will take to reopen the New York Stock Exchange. Not only will it be hard to get to the building through a city filled with emergency vehicles and rubble, but the trip will also open a floodgate of emotion for the people on the floor. It will be a long time before they can focus fully on business as usual. It will be a long time before they can walk through lower Manhattan without a keen sense of loss -- loss of friends, mentors, and the twin icons of financial freedom.

It will be a long time for all of us.

On Monday, however, the stock market will reopen, though it won't be as usual. Some commentators talk of the potential for a big sell-off, as investors flee to safe havens like gold and Treasury securities until a sense of order returns. Some suggest abandoning the industries that will bear the economic brunt of the disaster -- insurance, travel, and retail stocks. Some even say that this event could push our already teetering economy into full-blown recession.

More levelheaded commentators remind us that selling into a panic, with little idea of how individual businesses will be affected, is a mistake. By remaining closed for four days, America's markets avoided the knee-jerk reaction to the disaster suffered by European and Asian markets. It has given investors time to think about real economic consequences, rather resort to wild speculation.

And investors have thought. A Harris poll released today showed that, while 35% of respondents think that the market will go down a lot, only 1% say that they will be selling when trading resumes. The impression is that others will fly to safe havens, but that we will keep our heads. It seems, however, that we all intend not to panic.

There is no question that certain businesses will be strongly affected by this tragedy. The four-day shutdown, increased security, and fear of flying will certainly hurt airlines this year. It's even possible that Monday's trading will be volatile, though a total collapse seems less likely now that major securities firms and corporations have agreed to prop up plummeting shares. There is good reason to think, however, that the markets and the economy will not suffer gravely in the coming months. In fact, it may well become stronger.

How the market has responded in the past
The site has compiled some statistics on past market reactions to significant attacks.

Acts of war:

  • Pearl Harbor: Following the Japanese attack on Pearl Harbor in December 1941, the Dow fell about 7% in two days and 10% over two weeks. After one month had passed, it stood 1.5% below the level it traded at before the attack. After six months, it was down 10%.
  • Invasion of Kuwait: Following the Iraqi invasion of Kuwait, the Dow began a slow skid, falling 2% on the first day of trading and almost 9% over the first month. By the end of six months, it had rebounded to 4.6% below pre-war levels.

The market in these cases was affected not so much by the event itself as the ongoing crisis. In both cases, prolonged periods of war followed, which took a continuous toll on the economy. Both attacks ushered in a period of higher inflation, which lasted for a short while as the nation reacted to the initial event. Once normalcy returned, inflation fell and the market recovered: The Dow was up 28.2% two years after Pearl Harbor, and 24.3% two years after the invasion of Kuwait.

Acts of terrorism against the United States:

  • First World Trade Center Bombing: On the day after the first attempt to bomb the World Trade Center, the Dow fell 0.5%. It rose more than 2% over the next month and 8% over six months.
  • Murrah Building Bombing: The Dow reacted to the bombing of the Murrah Federal Building in Oklahoma City by rising 0.5%. It rose 3% over the next month and 14% over six months.

The noteworthy thing about these events is not the direction of movement per se, but the fact that the movement was not disproportionate to normal stock market behavior. The rise in the Dow following each attack had more to do with other factors in the economy than it did a reaction to the event. Basically, the attacks did little to harm the market or the economy.

It must be recognized, however, that the attacks on Sept. 11 were of a greater order of magnitude than these. They did considerably more damage to the nation's infrastructure and consumer confidence than previous attacks. A better comparison may be natural disasters, which decimate local economies for a short while, but spur a flood of spending.

Natural disasters:

  • Hurricane Andrew: This 1992 disaster caused an estimated $20-$25 billion in damages, ranking as the most expensive disaster in U.S. history. Economic output in Florida stopped. In response, the Federal Reserve increased the money supply. Federal aid and insurance money poured into the region. While several businesses and insurance companies went bankrupt, the market was not affected. The Dow rose slightly in the sessions following the hurricane, was up slightly after one month, and finished up 4% after six months.
  • Los Angeles earthquake: The 1994 quake caused $15 billion in damage and $10 billion in lost output. Again, Federal aid and monetary policy helped turn the economic effect around, even spurring the local economy out of its four-year recession, according to The Dow responded by rising slightly in the following days' trading, but slipping 1.7% over six months.

Again, the market reacted generally in line with the overall economy, rather than the event. The economy of the areas affected suffered in the short term, as some businesses collapsed, but actually benefited in the long term, with the infusion of insurance and Federal aid money, combined with eased monetary policy.

We have already seen similar reactions to the World Trade Center atrocities. Though the losses have yet to be tallied and will approach the level of Hurricane Andrew, some insurers have already begun paying claims. The Fed has increased the money supply and is considering an immediate lowering of interest rates. The World Bank, too, is considering rate cuts.

The immediate, unified reaction to the tragic events of this week should reassure investors and consumers that the market and the economy can and will recover, even in the short term. So long as these attacks can remain isolated incidents -- which stepped-up airport and border security intends to assure -- they will not themselves significantly damage the overall market or economy.

Only our panic can do the long-term damage to our financial stability that the perpetrators of these horrific acts seek to achieve. With four days to think about our reaction, it is unlikely that Americans will give the terrorists that satisfaction.

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