I am still waiting, but waiting upon what exactly?

Markets: Undercurrent of anxiety the legacy of 9/11

Mike Blahnik, Star Tribune

Published September 11, 2003
MARK11

The terrorist attacks two years ago were a direct assault on the financial heart of America, closing the markets for nearly a week. The trading hiatus only delayed the panic selling: The Dow Jones industrial average fell a record 685 points the day the exchanges reopened, and an equal amount over the next four days to bring the week's loss to more than 14 percent.

Beyond the billions of dollars in damage and thousands of lives taken, the events of two years ago are still producing subtle aftershocks among markets and investors.

Market professionals add terrorism caveats to their forecasts. Individual investors readjust the risk in their portfolios and reevaluate the role investments play in their lives. Airline stocks reflect carriers' struggles through the continued travel downturn. U.S. Treasury securities command a higher safety premium.

When the first plane hit the World Trade Center before the start of trading on Sept. 11, 2001, stock futures traders didn't immediately suspect an act of terrorism. It wasn't until the second plane hit that traders realized the country was facing an unprecedented attack and stock futures plunged.

"It has made the market more sensitive to news events," said Bob Potter of JNBA Financial Advisors in Bloomington, who noted that stocks dropped Wednesday afternoon after a new tape purporting to show Osama Bin Laden hit the news.

"When there is something that happens, and we don't know what it is, the markets will sell off and ask questions later," Potter said. "And then when they find out it was something not terrorism-related, the market tends to bounce right back."

For instance, last month's massive blackout, after the close of regular trading hours, caused a 2 percent drop in stock futures, which recovered only after the government said it didn't suspect terrorism.

Before trading reopened on Sept. 17, 2001, investment advisers tried to calm clients by showing them that stock market drops in the wake of terrible events tended to be short-lived, and in fact presented good buying opportunities. Others urged "patriotic buying" to prop up the market. It plunged nonetheless.

"With all of the uncertainty and the event that happened, all of those things that were going on at that moment, [selling] wasn't irrational," said David Francis, head of equities at Minneapolis-based Thrivent Financial. "Right after this happened the economy pretty much seized up. . . . Risk was perceived to be very high, so stocks were priced at a huge discount.

"There were a lot of people who, right after that event, were predicting very hard recession as one of the residual outcomes of that event. And that didn't unfold."

After a weekend's rest, the market then started a three-month rally, recouping the post-Sept. 11 losses within a month and continuing even higher.

"It pretty quickly began to correct itself as things began to settle out and it became more clear what the tangible impact would be," Francis said.

The biggest hits were to the travel industry, but the rest of the economy recovered quickly, and the nation officially emerged from recession before the end of 2001.

"It definitely has had an impact on some segments of the economy . . . but 9/ 11 didn't seem to have that broad of a permanent impact on either the economy or the markets," Potter said. "We are a pretty doggone resilient people, and I think that the markets reflect that."

On a 3 1/2-year chart going back to the stock market's peak in early 2000, the September selloff doesn't appear nearly as volatile as when we lived through it.

Although the Dow closed the post-9/11 week at 8,235, it was back above 10,000 by that December. Then the bear market resumed, and in October 2002 the Dow bottomed at 7,286 -- a cumulative drop of 4,436 points from its January 2000 peak of 11,722. Since October, it has "retraced" nearly 50 percent of the drop, closing Wednesday at 9,420.

Still, intangibles hang over the markets.

"There is a kind of permanent anxiety that's built in now," said economist Daniel Yergin, chairman of Cambridge Energy Research Associates, though he noted that the economy finally seems to be emerging from a "freezing up of confidence."

The 9/11 attacks "occurred along with the bursting of the [dot-com] bubble, a huge buildup of inventory, overcapacity, and the corporate governance scandals. Everything came together to really hit very hard at confidence," he said.

"We've come quite a way back from where we were. It's maybe hard to remember what the mood and psychology was in those first months. There is a sense of continuing vulnerability, and as we look back on the boom markets of the 1990s, one of the mistakes was a real exaggerated sense of security."

Oil markets remain very sensitive to terrorism threats and geopolitical unrest, he said.

"We've seen, for quite a long time now, high oil prices and high natural gas prices at levels that are a burden on the economy. Some of that reflects fundamentals, but clearly the oil market is very sensitive to what happens in terms of geopolitics."

The possibility of more terrorism perhaps never will leave market forecasts.

"A phrase that's become part of the language is 'event risk,' " said Francis, who often gives presentations to clients and Thrivent advisers. "At the end I say, 'Now, everything I've told you assumes no event risk.' "

The events of Sept. 11 still affect individual investors, too.

"There's no doubt, since Sept. 11, people have taken a look at their life and said, 'Is this what I really want to be doing with my time, my energy and my money?' " said Jim Lund, a Certified Financial Planner at Lund, Krey & Associates in New Brighton.

"At the same time, they've looked at their investments and asked, 'Am I taking on more risk than I want to?'

"If there's anything good that came out of Sept. 11, it's that it has gotten people to think about what they want," Lund said. "And I find more people are spending more time with their families."c