Markets & Finance

September 11's Lesson for Investors


Few Americans are likely to forget where they were on Sept. 11, 2001, especially if they were in Manhattan. The terrorist attacks that came out of the clear blue sky that morning shook a nation to its psychological and financial core (see BusinessWeek, 9/24/01, "Terror in America"). Investors have managed to move on, but they're not forgetting, either.

In the five years since the World Trade Center attacks, major stock indexes have posted modest advances. As of afternoon trading on Sept. 8, 2006, the Dow Jones industrial average has gained 18.6% since September 11, while the broader Standard & Poor's 500 stock index is up 19%. The tech-heavy Nasdaq composite index has added 27.8%.

While those gains aren't spectacular, they reflect a stock market largely unfazed by the threat of another attack. For market pros and individual investors, the events of September 11 reinforced the importance of a diversified portfolio as protection against any calamity—terrorist or otherwise. The market rumbles on, but individual stocks and sectors have sometimes lagged along the way.

BOUNCING BACK. After the attacks, investors' immediate reaction was to panic. Stocks tumbled when the market reopened on Sept. 17, bottoming out on Oct. 9, 2002, when the Dow dropped to 7286.27. Since March, 2003, though, it has been a steady climb. On May 10, 2006, the Dow reached a six-year closing high of 11642.65, within 100 points of its all-time peak (see BusinessWeek.com, 8/21/06, "Can the Rally Keep Up?").

The same pattern has recurred after each major terrorist attack since September 11. Stocks retreated at first but eventually bounced back after the bomb blasts in Turkey in November, 2003, and the Madrid train bombing in March, 2004. It took less than a day for major indexes to recover following the July, 2005, bombing in London.

"9/11 put terrorism on the map as something you had to take into account," says Alec Young, equity market strategist at S&P Equity Research Services. "Since 9/11, every time there's a terror attack the market reaction gets smaller and smaller. The markets realize that terror events are nonrecurring, so basically they shrug them off."

POSSIBLE DRAG. In fact, markets have responded to terrorist attacks since September 11 much as they've behaved after other cataclysms throughout history. Disasters—whether the San Francisco earthquake in 1906, the assassination of President John F. Kennedy in 1963, or the Oklahoma City bombing in 1995—typically cause only a brief wobble for the markets, analysts say.

"It just takes an awful lot to break down the capital structure of the U.S., much less the world, with any individual event," says Dan Genter, president and CEO of Los Angeles investment firm RNC Genter.

Nevertheless, terrorism could still be acting as a drag on stock prices. For whatever reason, investors are willing to pay less today for a dollar of earnings than they were five years ago. The rolling four-quarter average price-to-earnings ratio for the Dow Jones Wilshire 5000 index was 27.25 in mid-2001. On Aug. 30, 2006, that measure had fallen to 19.55. "It's hard to quantify how much of that is a contribution from additional concerns over terrorism," says Steve Foresti, managing director and head of the investment research group of Wilshire Consulting.

Meanwhile, specific sectors and asset classes have reacted to terror differently. Gold, bonds, value styles, and defensive sectors typically performed well immediately following terrorist attacks in the past five years, says Sam Stovall, S&P's chief investment strategist, in an Aug. 10 report (see BusinessWeek.com, 8/11/06, "In Response to Terror"). However, investors subsequently shifted each time to more cyclical sectors, such as consumer discretionary, information technology, and telecom stocks.

DEFENSIVE STANCE. Overall, energy stocks such as Exxon Mobil (XOM) and Chevron (CVX) have been among the biggest winners the past five years. The Dow Jones Wilshire U.S. Oil & Gas index more than doubled from Sept. 10, 2001, to Sept. 1, 2006. However, recent declines in oil prices could signal cooler days ahead for the sector (see BusinessWeek.com, 8/14/06, "S&P Downgrades Energy Sector to Market Weight"). "The easy money's been made," says S&P's Young.

Defense-related companies have also posted gains amid anti-terrorist efforts and the war in Iraq. "You've got longer-term trends that weren't just driven off that one event," notes Ryan Crane, chief investment officer of Stephens Investment Management. As of afternoon trading on Sept. 8, Raytheon (RTN) has surged a dividend-adjusted 110% since Sept. 10, 2001, while Boeing (BA) is up 82.9%.

At the same time, some groups that tumbled after September 11 have rebounded strongly. The Dow Jones Wilshire U.S. Travel & Leisure index slid for much of 2002 but rallied nearly 50% from Sept. 10, 2001, to Sept. 1, 2006. The Dow Jones Wilshire U.S. Industrial Goods & Services Index is up 36% since Sept. 10, 2001, again despite weakness in 2002.

AVOIDING EMOTION. Automotive stocks such as General Motors (GM) and Ford (F), however, have declined steadily the past five years. The Dow Jones Wilshire U.S. Automobiles & Parts index lost 19% from Sept. 10, 2001, to Sept. 1, 2006, despite a modest bounce in late 2004. Meanwhile, technology stocks gained only slightly over the period after steep losses in 2000 and 2001.

With or without terrorism, investors should be prepared for the unexpected, analysts say. "If there's a lesson to be had from the tragic event, it's that event risk is with us, and it's not going to go away," says Rob Brown, chief investment officer of Genworth Financial Asset Management.

Ultimately, the risk of a major terrorist attack is yet another reason for investors to diversify their portfolios and avoid making investment decisions based on emotion, says Barry Ritholtz, chief market strategist at Ritholtz Research & Analytics. "Your emotions tend to lead you to an easy response to stop whatever pain you're in, but that may not necessarily be the best investment advice," Ritholtz says.

The September 11 attacks changed everything, politicians often remind us, and to some extent they're right. However, the wisest investing approach is one that held true before that terrible event, and still applies today: a diversified portfolio geared for the long term. Don't forget it.


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