The Economy After Sept. 11
DENNIS SMITH
While the firefighters and police continue their heroic work at Ground Zero, once again I have asked my good friend and business partner, Jack Mayberry, the chairman and chief investment officer of Core Asset Management, to write this column for me.
PERFORMANCE OF THE DOW JONES INDUSTRIAL AVERAGE AFTER ECONOMIC AND POLITICAL CRISES APPRECIATION
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Market low after crisis
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1 year later
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2 years later
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Berlin blockade:
7-19-1948
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-3.3%
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13.2%
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Korean War:
7-19-1950
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28.8%
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39.3%
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1962 market break:
6-26-1962
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32.3%
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55.1%
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Cuban missile crisis:
10-23-1962
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25.0%
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33.0%
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Kennedy assassination:
11-22-1963
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7.2%
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3.1%
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Gulf of Tonkin:
8-6-1964
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43.6%
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53.9%
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1969-70 market break:
5-26-1970
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42.2%
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66.5%
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1973-74 market break:
12-6-1974
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27.9%
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5.9%
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1979-80 oil crisis:
3-27-1980
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22.9%
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54.3%
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1987 crash:
10-19-1987
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22.9%
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55.3%
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Persian Gulf War:
8-23-1990
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23.6%
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31.3%
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World Trade Ctr. attack:
9-11-2001
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AVERAGE APPRECIATION
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25.8%
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37.5%
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Source: “Contrarian Investment Strategies:
The Next Generation” by David Dreman
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Given the very serious economic impact of the attacks on New York and Washington, it seems best to discuss the economy and the stock market in light of the horrific events. From that, an investment strategy will emerge.
The economy. The economy of the United States had been weakening before Sept. 11. In the autumn of 2000, companies began to rein in spending on new computers and information technology equipment. Capital spending slowed month after month, causing a very sharp decline in technology companies. By summer, spending by consumers had begun to weaken. Companies were making regular announcements of large cuts in staffing. The stock market was falling again, after a failed attempt in the spring to mount a rally and end the bear market.
Then came Sept. 11. The attacks were a shock to the economy. For a time, all economic activity slowed to a crawl, and a weak economy fell deeper. Several important areas of the economy remain significantly damaged by Sept. 11. Airlines, of course, have suffered a very steep decline in traffic, but many sectors have been seriously affected. This can be seen by the increasing pace of layoffs since the attacks.
The Labor Department reported that, in the month of October, the number of people who lost jobs was the largest in years.
The gross domestic product (GDP) of the United States, the broadest measure of economic activity, fell in the summer months for the first time in a decade. The report for the fourth quarter of this year will almost certainly show a greater shrinkage in the economy.
Stock market’s response. The stock market closed for four days because of the attack, then plunged when it reopened to levels not seen since the financial crisis of 1998. Since Sept. 21, the market has climbed steadily. The S&P 500 is up 15% as of this writing, and the Nasdaq by 28%. What has happened? How can the stock market be so disconnected with the real economy?
Recall that the stock market generally reflects what investors consider likely to happen in the future. The market appears to be saying that the economy will begin to recover, perhaps in six months. The stock market is taking note of the very favorable interest rate environment and the policies that the federal government and the Federal Reserve Board are using to stimulate the economy.
Stimulating the economy. After Sept. 11, the Fed pumped large amounts of money into the financial system to deal with disruptions in the banking and securities settlement areas. In addition, since the 11th, the Fed cut the federal funds rate by another 1.5% to 2.0%, the lowest level for fed funds since John Kennedy was president. The Treasury Department announced that it was ending the issuance of 30-year Treasury bonds, a measure apparently designed to lower long-term rates and to make home mortgages cheaper. Further tax cuts, extensions of unemployment benefits and additional measures are being debated. All these actions will ultimately help to reverse the economy’s decline.
Predictions that economic recovery was just around the corner have been made repeatedly – and wrongly – for a year. We cannot know now when the economy will begin to grow again, but we can be very sure that it will. Based upon this certain knowledge of recovery and in light of the very favorable fiscal and monetary policy actions by the government and the Federal Reserve, stock market investors have been taking advantage of the low prices on offer after September, and buying in anticipation of economic improvement.
Stock market gains after crises. The table accompanying this column shows the performance of the Dow Jones Industrial Average after major political, economic and financial crisis since the end of World War II. The table shows the returns on the Dow from the low points following the events. In general, the stock market showed very strong gains after the sometimes sharp market declines occasioned by these events. Although each crisis had a different character, the United States recovered and strengthened itself. The Dow provides one simple way of measuring the persistence of strength and growth. The present crisis challenges us in new ways, but we can draw yet again on the spirit of optimism, ingenuity, and confidence that has characterized the country for a very long time.
This autumn may well represent another particularly good time to own stocks, when the fiscal and monetary environment is so favorable and when stocks have been marked down by so much.
Related:
About the Author - Dennis Smith
Dennis Smith is the founding editor of Firehouse Magazine and the best selling author of
Report From Engine Co. 82 and other books. He has completed the federal Series 7, Series
63 and Series 65 exams and is a licensed financial advisor. Dennis Smith will be providing
some financial insight beginning with the January issue of Firehouse Magazine, as well as
authoring regular on-line commentary for Firehouse.com.
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