Market Should Rebound

Investors are likely to be more conservative after the terrorist attacks Sept. 11 on the World Trade Center in New York City and the Pentagon near Washington, D.C.

Defense, energy and technology stocks will likely benefit. Travel and insurance companies will take a hit for obvious reasons, said John Taylor, owner of the John Taylor Financial Group of Fort Smith.

Large companies will probably fare better than smaller companies, said Wayne Lee, chairman of the finance department in the University of Arkansas’ Walton College of Business.

“In this kind of market, where there’s a fear factor, I think you’re going to go to the kind of companies that you have confidence in — the larger companies rather than your smaller companies,” Lee said.

The largest company in Arkansas, of course, is Wal-Mart Stores Inc. of Bentonville, the world’s largest retailer, with $168 billion in sales last year. In addition to being a finance professor and chairman of the department, Lee also holds the Alice Walton Chair in Finance at the UA. Alice Walton is the daughter of Wal-Mart founder Sam Walton.

“I would hate to think that an incident like this would cause the kind of economic chaos that would bring down an economy like this,” Lee said. “That’s just too unbelievable a doomsday scenario. But I think it will make a difference in the kinds of investments people make. They will avoid risk now. It’s a good time to be in bonds.”

Big Brother

Northwest Arkansas’ economy runs on chickens, trucking and Wal-Mart.

“I don’t see [the terrorist attacks] being bad for any of those, frankly,” Taylor said.

Lee said Wal-Mart might even benefit from the disaster in the short run. In times of fear, people hoard food and other goods. It’s a “knee-jerk reaction,” Lee said, much like the irrational rush to buy gasoline the day of the attacks, but it might give Wal-Mart a brief sales boost nonetheless.

“If you think the end of the world is coming, Wal-Mart will be glad to sell you what you want,” Lee said. “It will actually be positive instead of negative for them. People stock the shelves. Next week, it will be back to normal.”

Although the run on stores will have subsided within days, Lee said, the kamikaze crashes into three of the most famous buildings in the United States will have long-term ramifications.

“I think the whole area of security is going to change,” Lee said. “Travel is going to change definitely. There will be more hassles, more security checks.”

Lee said the technology sector, which has been on a downhill slide, may rebound somewhat as demand increases for high-tech security systems and metal detectors similar to the kind used in airports. The electronics sector may also benefit as a result.

“You have to be willing to pay the price for security now,” Lee said. “It’s going to be an even bigger hassle. That’s one of the things we’re going to have to bear … We’re going to have to be prepared to pay the price. Privacy, I think, is going to disappear.”

Lee said closed-circuit television cameras are already used by police to monitor the streets of London. Such precautions may become common in this country as well.

The Drop

Taylor said there will be a selloff when the market reopens, but “I don’t think we’re going to be a bunch of cowards.” Taylor predicted the first day drop in the Dow Jones Industrial Average of about 5 to 6 percent.

Trading in government bonds and some commodities resumed on Sept. 13.

But the New York Stock Exchange, the Nasdaq Stock Market and the American Stock Exchange were closed Sept. 11-14, the longest closing of the stock markets since 1914, when the NYSE closed for 4 1/2 months because of World War I. The last big shutdown because of physical damage to the markets was due to the 1835 New York City fire.

Stock trading was scheduled to resume Sept. 17. We went to press with this issue of the Business Journal on Sept. 13, so it was unknown at the time of these interviews how the market would react to the news when it reopened.

On Sept. 11, the day of the attacks, the Dow Jones Stoxx 50 Index of European blue-chips fell 6.1 percent to its lowest level since August 1998. The London Financial Times-Stock Exchange 100-share index plummeted 5.7 percent on Sept. 11, its biggest one-day drop since 1987, wiping $98 billion off the value of shares. The stock markets dropped by even larger percentages in France (7.4 percent) and Germany (8.5 percent). The European markets stabilized somewhat by Sept. 13, although most (except for the FTSE) were still on a slight downhill slide.

Trading was thin on Sept. 12. Much of the world’s financial system was shuttered that day, as businesses and government tried to deal with the terrorism and how it might affect the economy.

Major banks around the world pumped more than $80 billion into financial markets to prevent gridlock as the markets fluctuated wildly.

Markets in Asia also improved Sept. 13 after a day of selling off.

On Sept. 12, Asia’s largest market, Japan’s benchmark 225-issue Nikkei Stock Average, plunged beneath the key 10,000-point mark for the first time in 17 years. The Nikkei closed down 682.85 points, or 6.6 percent, at 9610.10.

The Asian markets closed mostly higher Sept. 13, rebounding from the previous day’s plunge.

Analysts said the turnaround may not signal a recovery from the terrorism shock.

South Korea led Asia’s gains Sept. 13, with the main index closing up 5 percent. Japan’s Nikkei 225 average was up less than 1 percent on Sept. 13.

Pearl Harbor

The Sept. 11 attacks have reminded many Americans of Dec. 7, 1941, the day Japan attacked Pearl Harbor.

One day later, the Dow fell 2.9 percent, according to The Wall Street Journal. Six months later, the Dow was down 9.7 percent. But 12 months after Pearl Harbor was bombed, the Dow was only down 0.1 percent. An economic recovery was under way by that time, and production for the war effort probably contributed to that.

Lee said a drop of 2.9 percent in the Dow wouldn’t be considered particularly bad these days.

“We’ve had declines of 2.9 percent,” Lee said. “Why should that be bothersome?”

Taylor said the initial selloff will mean little in the long run.

Taylor believes Alan Greenspan will lower interest rates again in the wake of the terrorism. The event will likely prompt the government to take other measures to jump-start the sputtering economy, such as relaxing capital gains taxes and giving business tax incentives. The government could also use investment tax credits to pump more money into the economy.

Ultimately, war fuels the economy, and the United States appears to be on the verge of war.

Insurance

The collapse of the World Trade Center’s twin towers will cost U.S. insurers at least $10 billion in claims, the National Association of Insurance Commissioners said. Some observers believe the the total could exceed $20 billion.

While the impact will not be felt immediately, insurance policyholders in Arkansas can expect their premiums to rise as a result of what is expected to be the largest insurance payout in the industry’s history.

“We will see it in the form of the insurance companies that do business here having to pay more for the reinsurance they purchase, which will be reflected in the rates Arkansans pay,” said Lenita Blasingame, director of the Arkansas Insurance Department’s property and casualty division.

“This is expected to exceed the $20 billion cost of Hurricane Andrew in 1992,” she said, referring to the most costly single event the insurance industry has ever faced.

And that may be strictly in commercial insurance payouts, she said, because insurance claims on the World Trade Center buildings and the aircraft alone may be $5 billion.

The total price tag will soar with the inclusion of claims against personal insurance policies covering cars and private residences and life insurance on the lives of thousands believed to have died in the attacks.

Another line of exposure is worker’s compensation claims for those people who were on the job when they were killed or injured, Blasingame said. She predicted many stress-related claims against workers’ comp coverage.

The previous record for insurance claims in a man-made disaster was $3 billion for the Piper Alpha oil platform in the North Sea in 1988.