Investing In A Post-WTC Economy

Consider the economic fallout from the bombings. Government officials estimate more than $30 billion in damage in New York alone from the attacks, with thousands of businesses destroyed or displaced. The good news is that after a 15% drop from September 17 through September 21, as of mid-October both the Dow Jones Industrial Average (DJIA) and the Nasdaq index climbed back to pre-September 11th performance levels. All markets have been buoyed somewhat by continued interest rate cuts by the Federal Reserve Board — the latest as of this writing a half-point cut on October 10, 2001 — and by news of upcoming economic stimulus packages designed to bolster consumer confidence and prop up suffering industries like the airlines and travel sectors.

By mid-October 2001 the Fed had slashed rates to 2.5%, the lowest figure in 40 years. Many economic observers believe that the Fed will cut rates further by year-end. While President Bush's $1.35 billion tax package works its way through the economic system, the White House has proposed $100 billion in new tax cuts and expenditures to jump-start the economy and help Wall Street dig out from an 18-month bear market.

While Wall Street is a tough place to be these days, financial observers say the long-term future looks positive. "Clearly, nothing quite like these incidents has occurred before," says Vanguard Group chairman John J. Brennan. "But this nation, its people, and its financial markets have overcome many challenging events in the past, including world wars, assassinations, terrorist attacks, and natural disasters.

"So despite the human toll of the events on September 11, and despite the huge costs of recovering from them, the enormous power and productivity of the US economy is intact," Brennan concludes. "Our people, our economy, and our markets have proven their resiliency over and over again."

So far, Brennan seems to have patriotic support among individual investors. "I withdrew funds from my savings and purchased additional stock in US companies the day the markets reopened," offers Elizabeth Bozzell, a 51-year-old insurance agent and business owner from Weatherford, TX. "I see it as a vote of confidence in our people, our government, and our economy, and one in the eye for those who wish us evil."

WALL STREET AND WAR

If history is any guide, that attitude may well pay off for investors like Bozzell. According to a recent study by Ned Davis Research, the Dow Jones indicator tends to fall immediately after declarations of war, then rally again in the months that follow. After looking at 28 military events from World War II through to the end of the Persian Gulf War, stocks fell 7% on average. Within six months, however, stocks rebounded to finish, on average, at 12.5%. The company says that the length of conflict is the key. In long, drawn-out affairs like World War II and the Vietnam War, stocks tend to remain sluggish. In short-term conflicts like the Gulf War, stocks tend to rise significantly (20% immediately after the liberation of Kuwait).

How long the war against terrorism will take, or even what shape it will take, is largely unknown. Still, in the weeks following the terrorist bombings of New York and Washington, Americans remained surprisingly resilient. A September 2001 survey of 4,600 US adults by Harris Interactive says that while many braced for the worst after the bombings, Americans said they would not spend less nor alter their investment decisions, and won't necessarily change their personal behavior, apart from cutting down on their flying. In fact, only 1% said they would sell stocks at all — a figure upheld by market observers after the tumultuous first week of trading after the markets reopened. Still, consumer confidence did wane after the anthrax threats throughout October, and Wall Street will need confident consumers to climb back into bull territory.

Merrill Lynch global investment strategist David Bowers expects consumers and investors to slowly regain the confidence they lost in the days following the terrorist attacks, adding that government and monetary support are critical to a renewed and reinvigorated investment environment. "None of us would have wished for such a dreadful catalyst, but a monetary capitulation could be under way," Bowers says. "We have seen a major synchronized easing in monetary policy and a significant shift in US fiscal policy."

Along with further reduction in interest rates, the US worked with global partners such as Great Britain, Japan, and France to ensure that money supplies were plentiful in the event of massive selloffs in global financial markets. The best bet for investors? Let the economic medicine do its work — and be patient. "People should not make knee-jerk reactions," Bowers says. "They should stop, take stock of the entire situation, and look at the fundamentals of companies and stocks."

SECTOR OUTLOOK

The attacks of September 11 not only shook the world; they also shook traditional investment sectors. Which were affected most, and what does that mean to you as a concerned investor? Let's look at the sectors hit hardest:

Travel: US airlines suffered a massive blow on September 11. Chicago-based Midway Airlines threw in the towel right away and shut down. Others, like US Airways, American, and Continental, began issuing pink slips right away, with almost 90,000 jobs lost by September 20, 2001. Congress green-lighted a $20 billion bailout program for the airline industry within 14 days of the bombings, with $5 billion flooded into the industry by President Bush and Congress within days of the attacks. But since it will take time for Americans to gain the confidence to fly again, particularly after the unrelated airplane crash out of John F. Kennedy airport in Long Island in November, airline stocks are not the place to be for the faint of heart. Tip: Consider investing in companies that develop teleconference software. Businesses looking to safeguard themselves from air-travel calamities are likely to look closer at software that can bring people together via teleconferencing tools.

Insurance: Major media outlets and many Wall Street pundits are ultra-bearish on insurance stocks. That's what happens when an industry wakes up one morning and finds itself liable for more than $15 billion in damages. But few are acknowledging that the insurance sector's liability in Washington is zero (the government insures itself against attacks on its buildings). In addition, the insurance industry has some deep pockets after a decade-long run with few major calamities in a post­Cold War world. Plus, commercial insurance in Manhattan's southern tip is spread among dozens of global insurance companies, thus reducing the risk for each. Tip: look for insurance companies like Annuity & Life Re (Holdings) Ltd. (ANR) that don't cover group plans or corporate life products. Business owners can expect catastrophe coverage to rise sharply.

Financial Services: That it only took Wall Street four business days to reopen the New York Stock Exchange — even as traders grieved the loss of their friends and associates — speaks volumes about the powerful US financial sector. In the short term, companies that called the World Trade Center home, such as Morgan Stanley Dean Witter, American Express, and Merrill Lynch, may have some emotional and logistical difficulties getting fully back on their feet. Tip: Long term, don't worry about the brokerage and banking industries. They have some of the fattest bank accounts of any industry on the planet, so they can financially withstand the damages sustained on September 11. In fact, if prices go low enough, consider adding them to your portfolio. If the stock market does indeed rise in 2002, as virtually all Wall Street observers say it will, then expect stocks of investment banks to be the lifeblood of Wall Street and rise accordingly.

Health Care: The US health care sector will not be severely affected by the events of September 11. Tragically, that's because there were so few survivors in the disasters (most people either escaped without harm or did not escape at all). Tip: If you have a Cigna or an Aetna in your portfolio, don't worry too much about it. You might take a short-term hit, but in the long run those companies look more valuable than ever. You may also want to focus on biotech companies that develop antichemical vaccines — insurance policies in an uncertain new world.

Information Technology: Even as the World Trade Center continued to burn on September 11, New York City firms were on the phones with computer services providers, looking to replenish technology inventories decimated by the bombings. That includes information technology (IT)­related hardware and support, applications outsourcing (ASP/ISP/xSP), network infrastructure support, and telecommunications services. So companies like Dell, Oracle, and Intel may increase sales for the hundreds of Manhattan-based companies — and their corporate outposts — that need help. Insurance companies will be picking up most of the tab, so IT spending could be bountiful for these companies.

Media: Even before the tragic events of September 11, media companies were struggling with weak advertising revenues. Consequently, the effects of the World Trade Center bombing were felt immediately by media companies. For the broadcast networks, nearly a week of revenues were lost because there was no advertising during the news coverage, which preempted regularly scheduled programming and sports events as well as other special programs. That, coupled with the increased costs associated with the additional coverage of the event, will make the AOL/TimeWarners of the world a tough place to be for investors until 2002.

Biotechnology: Sectorwise, Wall Street has seen an uptick in biotechnology (especially anthrax-fighting biotech stocks, which have posted triple-digit gains since September 11). The one constant in the US stock market since September 11 has been volatility. The US stock market fell from 9,600 to 8,100 and then rose back to 9,400 — all within 19 trading days. Such ebbs and flows are not attractive to everyday investors who may want to avoid plunging too much money into such a chaotic trading environment. As usual, the best approach is a long-term one, with a diversified portfolio of stocks and bonds that can mitigate problems when bear markets inevitably arise.

INVESTMENT STEPS TO TAKE

Regardless of what happens in the financial markets for the rest of 2001 and early 2002, some smart investment steps you can take might help mitigate portfolio loss and may even help the economy along. Take a deep breath, because some of it may hurt:

Expect some short-term bad news. Investors may see some negative effects on consumer spending that could hurt the economy.

Look to the Fed for help. If Alan Greenspan & Co. continue to provide liquidity and/or lower interest rates, consider getting back into the market if you're on the sidelines. Both are good indicators of market upswings.

Stay disciplined.Investment decisions made in panic tend to be bad ones.

Stay diversified. Investors always need to be well-diversified across broad asset classes, such as stocks, bonds, and cash. That's especially true in an extremely uncertain stock market environment like the one we're seeing now.

Be patient. There's no way to sugarcoat it. The World Trade Center bombings were catastrophic for Americans and for the financial markets, too. In time, the technology needed to run the markets will be repaired and business will resume. In the short term, however, emotions are likely to cause the financial markets to gyrate significantly. If so, keep a cool head and stick to your long-term game plan.

The truth is that terrorists tried to put Wall Street out of business but failed, as the quick turnaround of the New York Stock Exchange attests. In troubling times, that should make all of us feel better about our financial security.

Brian O'Connell is a Philadelphia-based freelance financial writer. His most recent book is CNBC's Creating Wealth. He can be reached at briano@tradenet.net.

SIDEBAR

Investment Websites

Here are some websites where you can follow the financial markets. All provide up-to-the-minute market activity, stock quotes, and other market and economic news that can affect your investment portfolio.

Hoover's stock screener: www.stockscreener.com

Silicon Investor: www.siliconinvestor.com

Morningstar.com: www.morningstar.com

Quicken: www.quicken.com

Stocktools: www.stocktools.com

Wall Street Research Net: www.wsrn.com

PC Quote: www.pcquote.com (real-time stock quote service)

Reuters Moneynet: www.moneynet.com

Investor Guide: www.investorguide.com

Current and past articles from Working Money, The Investors' Magazine, can be found at Working-Money.com.