The Experts
| Lummer's Logic |
|
 |
 |
| Tragedy Aftermath
|
|
By Scott Lummer
Chief Investment Officer, mPower |
Sept. 14, 2001
Security exchanges in the United
States have been closed since Tuesday and are not expected to open until Monday. The
impact on U.S. stocks of Tuesday's attack is still uncertain, but the uncertainty hasn't
prevented several pundits from predicting very dire consequences. I disagree with them.
While there has been a huge effect on human lives and the nation's psyche, I believe the
impact on our economy will not be as severe, for several reasons.
Before talking about economic impact,
I need to comment first on separating the financial analysis from emotional and political
responses. The events of Tuesday shook me and most other Americans like no other event has
or likely ever will. These events will and should impact our foreign policies, and will
never leave our consciousness for the rest of our lives. Any comparisons I make between
Tuesday's attack and other catastrophes are purely in economic terms.
That being said, in terms of pure
property damage, the United States has experienced natural disasters that caused similar
amounts of physical destruction. Most recently, the earthquakes in Northridge in 1994 and
San Francisco in 1989, as well as Hurricane Andrew in 1992, caused large disruptions, but
had relatively minimal impact on national economic activity. According to news reports,
estimates of economic damage around the World Trade Center range between $5 billion and
$25 billion. By comparison, Hurricane Andrew is estimated to have caused $26.5 billion in
damage. As I said before, as an analyst I must separate the emotional distress of the
attack from the economic impact (which is hard to do, since I know several people who
worked in the World Trade Center). In terms of pure dollars and cents, however, the effect
of yesterday's calamity appears to be in line with the economic effects of natural
disasters the U.S. has experienced.
Much of the impact on businesses that
we see now will be short-lived. Of course, some companies will face severe hardships. But
the economy is made up of thousands of businesses, and the impact felt by a few of them
will not severely impede the economy. The largest effect we are experiencing right now is
the disruption of the transportation system. However, some airlines have already resumed
flying today, and over the next several days air service will slowly return to normal. The
FAA has enacted tremendously heightened security measures, which will result in
inconvenience but will not dissuade business travelers from taking necessary trips. Of
course, it may take time for all people to regain complete comfort in traveling, but
Americans have always been resilient in terms of recovering from the fear of flying that
has followed air disasters.
In addition, the initial financial
data we are seeing suggests that the immediate reaction by many pundits was overstated.
Although in the few hours after the attack oil futures prices did rise substantially, they
have returned to their levels before the disaster. The first security markets to be open
after the attack were in Asia, and stocks were down sharply. However, the major European
stock exchanges in London, Paris and Frankfurt have all increased slightly in value in the
two days since the attack, meaning that the current consensus of security analysts is that
the impact on the global economy will not be harsh.
Finally, remember that most of you are
investing for long-term purposes. Although the European markets have been relatively
stable, I would not be surprised if the U.S. markets dropped sharply immediately after
opening. And we will certainly see a great deal of volatility. Yet, even if there are some
declines, they are not likely to be long-lived. The reasons why you should have invested
in stocks in the first place, mainly long-term growth, are still valid today.
For these reasons, I recommend that
you do not make any changes to your investment portfolio as a result of Tuesday's attack.
There is a tendency in times of crisis, economic or human, to want to take action. For
those of you who can do something to ease the human burden, such as donating blood, I urge
you to do so. But no action is warranted on your investment portfolio. The prudent
investment reaction to Tuesday's events is no action.
 Lummer's Logic Archives
The information provided here is intended to help you understand the general issue and
does not constitute any tax, investment or legal advice. Consult your financial, tax or
legal advisor regarding your own unique situation and your company's benefits
representative for rules specific to your plan.
401Kafe.com is the
premier online community resource for 401(k) participants
Copyright ý 1996 - 2000 mPower. All Rights Reserved.
|
