What happens to markets in crises?

The terrorist attacks in the United States have fuelled a great deal of fear and speculation about what will happen in North America when markets re-open. There is no way to accurately predict what effect the New York and Washington attacks will have on domestic markets. But there are several indicators we can look at now that may give us insight into the economic aftershocks.

History is an important factor in considering the days ahead. Even a cursory examination of market trends in the Dow Jones Industrial Average shows one thing. Times of tragedy that result in American warfare are usually marked by initial stock market volatility. This is followed by a rally that can last for several months or years.

The New York Stock Exchange website gives this evidence:

1950-The United States Enters Korean War:
“On July 19, 1950 President Harry S. Truman announced that the United States would enter the Korean War. He asked Congress for $10 billion for a huge rearmament program. Truman’s message sent stock prices up, with stocks in the aircraft, auto, oil, copper and steel industries
leading the way.”

1963-President Kennedy Assassited:
“When investors heard on November 22, 1963 that President Kennedy had been assassinated, they quickly began selling stocks. Their fears and uncertainty over the nation’s leadership led to $13 billion worth of lost stock value in less than an hour. To control the panic selling, the New York Stock Exchange temporarily ceased operations.”

1971-Arabs Launch Oil Embargo, 1973:
“On October 19, 1973 oil-producing Arab nations cut off all shipments of oil to the United States. On November 9 the DJIA dropped 24.24 points, its steepest decline since 1962. Analysts said the drop was a belated reaction to fears of an energy shortage, which would increase transportation, manufacturing and a wide range of other costs across the economy.”

1990-Iraq invades Kuwait, Friday, August 3:
“On the day following Iraq’s invasion of Kuwait, the DJIA plunged 120 points before recovering to close at 2809.65, a loss of 54.95 points. Anxiety about the Mid-East caused oil prices to jump. Confidence in the U.S. economy faltered and consumer spending fell off. Stock and bond prices both fell, reaching a year low on October 11.”

1991-Operation Desert Storm, Thursday, January 17:
“A powerful worldwide rally greeted news that the U.S.-led coalition forces had dominated the early stages of the war against Iraq. The DJIA soared 11460 points – on trading volume of nearly 319 million shares – to close at 2623.51.”

Money moves to safety
Most major events in U.S. economic history led to results impossible to predict at the time. If history teaches us anything, it is that money moves first to safety, and then to opportunity.

We have already seen the flight to safety from international investors as gold and other “safe haven” investments surged in the initial hours following the destruction of the World Trade Centers.

The fact that European markets have mostly rebounded from losses last Tuesday tells us that investors worldwide are not suffering from a confidence crisis.

Buyers waiting
At the risk of sounding mercenary, it is important to note that many opportunities now exist in the uncertainty of North American markets. If panicked investors do start selling their holdings in vast numbers when the markets re-open, it is likely that they will encounter a large number of opportunistic buyers waiting in the wings.

The result over the next days and months could be a stock-market rally led by the Federal Reserve providing all necessary funds to staggered banks and brokerages and by Congressional spending to shore up the country’s defenses.

Long-term investors should observe the developments of the next few days with considerable detail. Rather than fear the opening of the markets, concerned investors could take a lesson from history and prepare for the bull’s return to Wall Street.

-with files from the New York Stock Exchange