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By Richard L. Kesner, President
The CommonWealth Group
Since the terrorist attack on the World Trade Center clients have been concerned about the future direction of the stock market and the economy. We appreciate your questions, but unfortunately have no definitive answers.
Very few, if any, analysts, money managers, or "experts" have experienced a direct attack on the United States. How the economy or the stock market reacts to these attacks over the next few months is impossible to determine. There are many variables of course; the primary being whether there will be additional attacks on the United States. As long as there is uncertainty with the current economic and political environment we feel that the volatility will continue.
For our clients, the good news is that their investments are being managed by professionals who are watching these events and the economics of the individual securities with close scrutiny. We have provided some of the manager's comments for your review:
"What should stocks be worth in today's world? This is really the big question today, and we fear the answer is not yet apparent. How much will life change in the future? How much will it cost corporations and governments? Will the costs produce inflation? Will the waves of liquidity being injected into the economy be enough to establish a bottom and a base from which companies can begin to rebuild their profitability? Will it be too much, and result in asset price inflation? How quickly can we catch at least some of the leading terrorist culprits, permitting consumers some measure of secure feelings?
These are open questions, and certainly stock prices need to be re-rated up and down to reflect the answers that evolve. But hiding in fixed income right now is not the answer for investors. The low-rates from short-term instruments are almost torturous, and longer bonds are poised for a bad run as stability and economic growth return. Investors throughout history have always done best through buying during uncertainty and panic, buying, as they say "low." Conversely, the proven path to underperformance and losses is to sell declines. Indeed, recent studies have shown that six months after an "external" crisis (war, assassination, earthquake, etc) the markets have been higher, on average and in nearly every instance. It may be difficult now, but the probabilities say do not succumb to any fear you may find arising within.
Staying the course when times are troubled has also been the hallmark of successful investors. We are not changing our approach to investing, which is primarily company-specific, though we are keenly interested in the state of the world, the country, and the economy. We believe that five years from now the current moment will not be seen as some kind of watershed after which everything had changed radically, but more as a transition period during which the ordering of society began to take on a higher priority."
Lowell Miller,
Miller/Howard Investments, Inc.
"The attack on the World Trade Center and the Pentagon occurred just when many analysts believed that the economy was at or near a bottom, with a recovery expected in early to mid 2002. We feel that the Federal Reserve's response to this crisis has inspired confidence in the integrity of our financial system and laid the groundwork for a powerful economic rebound in 2002."
Rockwood Capital Advisors, LLC
"The economic recovery, which was showing the first signs of positive momentum, could be delayed further if consumers decide to become more cautious than they already have been. Over the short run, equity prices will likely fall after markets reopen, but we believe this would be relatively temporary in nature and probably reflect the final "crisis" that will mark the bottom of the 2000/2001 bear market.
SIT Investment Associates, Inc.
"Foreign markets did sell off after the terrorist attack, but have since stabilized, which is encouraging. Americans are very patriotic, so we expect the U.S. stock market to stage a strong rally soon, just as it did when the Gulf War commenced. The war against terrorism, notably, will be very different than that of the Gulf War, but the increased federal government spending approved last week will likely boost the overall U.s. Economy in the near future."
"Our portfolios remain concentrated in "defensive" stocks that should perform well regardless of the state of the economic environment. Although corporate earnings in the third quarter will be down 6% to 8% from the prior year, this represents a considerable improvement over the horrific second quarter earnings. The average stock on our Buy List should post at least 30% annual earnings growth, which should enable them to emerge as market leaders in the upcoming months."
Navellier
"Due to the unprecedented nature of recent events, it is not really possible to find historical comparisons. It is unknown how economic behavior will change in response to the largest loss of life inflicted by foreigners on U.S. soil since the War of 1812."
"Government responses to the attack have been forceful and coordinated. President Bush has defined the atmosphere as war, and we expect a war mentality will ensure that policy actions will err on the side of excess. For example, central banks have cut interest rates and money supply is growing extremely strongly. Stock market regulations have been relaxed. Politicians are formulating relief in the form of tax cuts and aid to the industry most affected, air travel. Internationally, we've been pleasantly surprised by the widespread consensus that attacks on innocent civilians are intolerable, regardless of religious or political philosophy. The consensus is responsible for the apparent international cooperation in logistics, military support, and exchange of intelligence information. The United Nations is solidly behind the anti-terrorist sentiment. Even OPEC, which is dominated by Arab states, seems to realize that a lower price for oil during this period, is in its long-run interest."
"Regardless of the new international awareness of and coordination against terrorism, defending against an enemy is mostly an economic dead loss. For example, world equity markets have risen dramatically since 1989, the year the Berlin Wall fell. Instead of dedicating huge sums for missiles and standing armies, governments could lower taxes and/or return the money to the private economy, which makes the most efficient use of it. This "peace dividend" was real, and some part of it will now be used for military spending, intelligence gathering, or defensive capabilities, none of which are efficient uses of economic resources."
"Consistent effort and perseverance will be required to reduce, and hopefully rid, the world of its festering terrorism problem. These qualities are essential to solving any problem, and have been on display in many places since September 11. In the short-term, the surprise attacks created a sense of vulnerability which, combined with a fear of unknown future attacks, altered the patterns of everyday life in the U.S., including its economic life. This temporary alteration, occurring as the economy was already slipping into a cyclical recession, will make things look worse than they probably are for awhile. But the terrorist enemy, like any other opponent, has weaknesses that will eventually be exploited. The sense of its invincibility will decrease over time as justice is done. We are reasonable confident that a untied world of 6 billion will find and prosecute groups that kill innocent people. As time passes, people will revert to their normal activities, with the result that the economy will begin to bottom and then grow."
Rochester Partners
We believe in long-term investing. In addition we believe that investing in the strongest nation in the world and the strongest and best run companies should provide excellent long-term gains. We are encouraging investors to stay with their long-term plans.
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