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Historic parallels show rebound; patience and diversification key

Bouncing back from a near stock market disaster

Concerned investors watched the stock market carefully when trading resumed Sept. 17 for the first time since the Sept. 11 terrorist attacks.

In the first day of trading after the terrorist attacks, the Dow dropped 684.81 points and by the end of the week had registered its biggest one-week point decline in history. On Sept. 26, Treasury Secretary Paul O’Neill said it would take several more weeks to gauge the economic impact of Sept. 11.

“I don’t know how anyone could have been prepared for this incident,” said Ashby Foote, president of Vector Money Management in Jackson. “The tragedy was as horrible as one could imagine and there may be more, although increased security will go a long way to improve travel safety. My guess is that the Taliban will be gone [soon], the first and most significant victim of a campaign against terrorism that may last for several years. As the military succeeds in this mission, the economy and the markets will improve.”

Nancy L. Anderson, CFP, president of New Perspectives Inc. in Clinton, called it “gut-check” time.

“I’ve been holding a lot of hands lately, but most of my clients are, while nervous, willing to stick it out,” she said.

John Mark Holliday, CFP, executive vice president of EFP Inc. in Tupelo, said financial markets aren’t particularly fond of uncertainty and change.

“Not surprisingly, neither are most individuals,” he said. “As a result, events such as those of Sept. 11 tend to shake financial markets in the short-term. However, we have faced non-financial tragedies, wars and threats of wars several times over the past 100 years. While the markets may have been shaken temporarily in those cases, each time, the U.S. economy and its people have emerged more resilient and successful than before. Major non-financial events, however tragic or devastating, historically have only a short-term effect on the economy.”

“In the last 50 years, we have had many periods of economic gain and loss,” said Stacey L. Wall, president and CEO of Pinnacle Trust in Ridgeland. “There have been nine recessions, three wars, two presidents shot, one presidential resignation, one impeachment and the Cuban missile crisis. Despite the severity of these events, the country has recovered and prospered.

“Since World War II, corporate earnings are up 63 fold and the stock market is up 71 fold. Corporate profits per share have grown over 9% annually despite hard times. To be able to predict which way the next 1,000 or 2,000 points in the market will go is anybody’s guess, but looking at historical performance, the next 10,000, 20,000 and 40,000 points will be up. Short term, it may be a difficult period, but that is to be expected. America has always stayed the course, overcome and prospered. That is a very important variable that has remained a constant in our economy.”

Even though the Sept. 11 terrorist attacks were unprecedented, historic parallels can be drawn from several events. After Pearl Harbor, the Dow Jones Index was at approximately 117 in December 1941. By May 1942, it fell to 93, reflecting a 20% drop. By July 1943, it rallied to 145, said Bill Brame, first vice president of Morgan Keegan in Jackson.

In August 1962, during the time of the Cuban missile crisis, the Dow Jones Index was at 615. It fell to 550 in October, rose to 650 in December and 767 by December 1963.

The day after the assassination of President John F. Kennedy Nov. 22, 1963, the market “fell some 20 points in the 20 minutes before they shut down the market,” said Brame. “When the markets reopened under LBJ, the Dow went from 712 to 825 by April 1964, and 891 by November 1964.”

After the World Trade Center terrorist bombing Feb. 26, 1993, the S&P 500 was up .24% and up 6.16% one year later.

“These statistics show that most of these events did not seem to disturb the stock market to any noticeable degree,” said Holliday. “There was, if anything, a tendency toward above-average returns over the period following these events, at least after the first couple of days.”

After Iraq invaded Kuwait on Aug. 2, 1990, the market reacted negatively once again short-term, but the Dow soon began an ascent into the bull market of the 1990s, Brame said.

“The long treasury bond conversely dipped down until late 1993, rose again until the Orange County derivative scandal, dipped down again and has fluctuated since,” he said. “If the past is indeed an indicator of the future, then buying into such ‘panics’ usually bears fruit, but in each instance the temporary tragedies had almost no effect on the long-term.”

Holliday said perhaps the most serious market event, chronicled by Jeremy Siegel in “Stocks for the Long Run,” occurred when World War I broke out.

According to Siegel, “after the declaration of war by Austria-Hungary on Serbia on July 28, 1914, all the major European stock exchanges closed. The European panic spread to New York, and the Dow Jones Industrials closed down nearly 7% on Thursday, July 30. The market did not reopen until December. However, in 1915, the Dow rose 82% — its best year ever!”

Financial analysts say the economy was already in a downward spiral because of rising oil prices, the collapse of the Internet and technology bubble and decisions made by the Federal Reserve. Before the terrorist attack, the stock market was off more than $4 trillion. After the terrorist attack, it dropped $1.2 trillion even though some has been regained.

“The problems of the last few months before the tragedy were economic,” Brame said. “After this crisis, we will see the Federal Reserve as much more accommodative than in the past. There will be an economic boost form cleaning up and rebuilding New York. It will be much easier now to get a loan than before the tragedy.”

One financial analyst, who requested anonymity for fear of reprisal, said one ingredient contributing to the economic slowdown that could have been better managed was “the Greenspan factor.”

“Greenspan was trying to slow down the economy and was worried about the bubble in the stock market, specifically in technology and Internet stocks,” he said. “A lot of the market had been corrected two years prior to that. Greenspan didn’t take into consideration that in 1999, we were all scared of Y2K, so corporations spent money upgrading technology. Many had to, because contracts with various suppliers required them to be Y2K compliant. In 2000, they didn’t need systems upgraded because it was already done. That part of the technology bubble would have corrected itself, but Greenspan didn’t give it a chance to. After January 2000, Greenspan started pulling money in from the money supply, creating tight money. Technology firms were already beginning to see signs after the first quarter that they weren’t getting projected orders. For example, Greenspan was worried about all the borrowing in the stock market, and he could have made us all raise our margin requirements and that would have brought stocks around. The majority of the money in the S&P 500 was concentrated in the top 20 to 30 companies. It wasn’t allocated.”

Foote said the monetary policy from the Federal Reserve continues to have a deflationary bias — too little money chasing too many goods and services.

“The result is over capacity or under demand, which puts profits under pressure and corporate costs structure under the knife, meaning layoffs and cutbacks in spending,” he said. “When the Fed finally gets it right with more liquidity, the economy should really flourish with very low interest rates and a rising stock market.”

“Preparing for the worst means always protecting your short-term money,” And
erson said.
“In the last few years, investors have used their short-term money for investing in stocks. That’s unreasonable. For every short-term goal of three years or less, you need to pull aside the funds to cover this and

About Lynne W. Jeter

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