The Impact of September 11th

 

The Impact of September 11th

On long-term financial markets.

The tragic events on September 11th will forever be remembered around the world. As we pick up the pieces and try to continue with our daily lives, the question of how this event will  inevitably impact the economy. The truth is, this tragedy pushed the already fragile U.S. economy from a U-shaped recovery into a definite V-shaped recovery. The problem with this scenario is twofold: nobody knows how deep the "V" will be or how long the recovery will take. The good news is that several positive factors are already in place to keep the economy moving forward.

Economic Stimulus

 Immediately after the terrorist attacks, central banks around the world reacted in unison to provide liquidity to financial markets. Rate cuts from the Bank of Canada, European Central Bank and U.S. Federal Reserve were implemented to keep the wheels of commerce in motion. The Fed has cut interest rates 10 times in 11 months for a total of 4.5%. In addition, federal disaster spending will work to stimulate the lagging U.S. economy. In time, the combination of monetary easing and government spending will work to push the economy towards better times.

 

 

Looking Back

 

No other event in American history is comparable, but there is still value in evaluating past crisis to determine their effects on the market. Take a look at the chart below.

 

 

 

History teaches us that investors often over estimate the long-term effects of a crisis while underestimating the resilience of the U.S. economy. What does this mean to long-term investors? It tells us that trying to time the market is counter-productive. Market recoveries often occur quickly and for very short periods of time. So if you're out of the market, you're out of luck.

Reason For Optimism

My advice to you is to refrain from investing emotionally and to simply stick to your plan. I firmly believe that the system that enabled U.S. corporations to grow 63-fold since WWII is still intact. As investment sage Warren Buffet says, "Great investment opportunities come around when excellent companies are surrounded by unusual circumstances that cause the stock to be misappraised."