September 2001

Six weeks have now passed since September 11, 2001 – a date that will remain forever infused in our memories. As promised, I’d like to offer my comments on what it all means for you as an investor and what we can expect in future.

The Economic Response

While one tends to focus on the nature of the military response in a crisis situation, what concerns the markets above all is the nature of the economic response.

History shows that stock markets tend to follow a predictable pattern during crisis situations. The initial reaction is always marked by a sharp sell-off. Then, as fears of more serious economic repercussions dissipate, stock prices start to rebound.

So it is not surprising that after September 11, stock markets around the world promptly dropped in value by an average of 10 percent. What has been quite extraordinary is the speed with which we have recouped that lost ground, particularly in light of the latest anthrax scare. Just one month following the attack, the major US indexes had recovered most of their September 11th losses and our benchmark Canadian index, the TSE 300, was not far off. It appears that, at least for the time being, investors are not expecting the fallout from September 11 to make things much worse than already anticipated. That is to say, the possibility of a recession has been in the cards for sometime and stock prices prior to September 11 already reflected that risk. At this point, what remains to be seen is the extent to which the economy may continue to weaken, pushing the recovery further into the future. That means that we are not out of the woods yet, and more market upsets may be in the works.

Bear Market Blues

Although there was still a great deal of hesitation to use the “R” word prior to September 11, recession now seems to be a forgone conclusion in the United States and most likely here in Canada as well. It is this prevailing pessimism as to the economic outlook that has pushed stock prices lower and lower over the past 18 months or so.

By all accounts this has been one of the longest and nastiest of bear markets that we have seen in decades. What began as a necessary correction following one of the most speculative periods in stock market history, has dragged on into an extended downward slide, the result of lower than expected corporate earnings combined with fears of a deepening economic slowdown. While the markets have perked up with every shred of positive news, prices have eventually fallen off again as news on the economic front continued to worsen. As it stands now, since March 2000, stock market values have fallen between 30% to 40% or more on average (the infamous technology index, the NASDAQ, is down by more than 70%). Of course, none of you have sustained personal losses of any such magnitude. But the numbers speak to the severity of this market downturn.

The Recovery

The bad news is that the North American economies are in recession. The good news is that there is still every reason to expect this recession to be short-lived. Ironically, Sept. 11 may have had a positive effect in this regard. Immediately following the attacks, authorities here and in the U.S. responded quickly to stem any economic fall out by pumping the monetary system with billions of new liquidity as well as continuing to cut interest rates in a very aggressive manner. All of that amounts to very powerful economic stimulus and it is only a matter of time before it begins to take effect.

Given the information now in hand, the general consensus among economists is that we can look for a turnaround in the economy within the next 12 months. But of course, predicting where the economy is headed is a bit like forecasting the weather. What we do know is that the terrorist attacks have not damaged our economic and financial structures in any way. In fact, it can be argued that these have strengthened. So an economic recovery is inevitable, it is just a matter of time. And when it does come, the stock markets will respond. In fact, since investors try to anticipate these types of changes in the economic environment, we know that the prevailing sentiment in the markets will begin to turn long before the recession is actually over. So take heart, your investments will start to make money for you again and probably when you least expect it.

Geo-political Concerns

As you are reading this, you are probably thinking, “Yes, but what if there are more attacks ?” and, “What about the potential escalation of violence that this new ‘war’ on terrorism could unleash ?” These are all very real concerns, and clearly the fallout from any such course of events would not be pretty. But, it is easy to let these kinds of fears get the better of us when there is little evidence, at this point, to support such dire predictions. The world has faced many crises in the past. Although each situation has been unique, it would be completely erroneous to assume that the current circumstances are somehow more threatening than anything we have experienced before. We may even remember the tragedy of September 11 as the pivotal event that changed the world forever – for the better, not for the worse.

We all know that it often takes catastrophic circumstances to propel us to find solutions to problems that have gone unresolved for far too long. The threat of international terrorism is not new. To my mind, it is but one of the concomitant challenges brought on by today’s fast and furious pace of globalization. Let’s hope that after enduring the tragedy of September 11, we will learn how to find less expedient and more compassionate approaches to surmounting these challenges.