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September 27, 2001

Market will be fine over long term, professors predict

Expect the U.S. stock market to remain vola- tile for the next six months to a year, in the aftershock of Sept. 11's terrorist attacks — but don't go dumping stocks or overhauling your long-term investments, two Katz Graduate School of Business professors advise.

"If you were to ask me, am I taking money out of my investments? I would say no," said Kuldeep Shastri, Ahlbrandt Professor of Finance. "I don't expect to retire for another 15 or 20 years, and I think within that time period the market will be fine."

"I feel exactly the same way," said Ken Lehn, who holds the Katz school's McCullough Chair in Finance. "It's futile to try to predict market movements in the short run but, fundamentally, our economy is sound and people should continue to invest as if none of this ever happened. In the long run, they will be well-served by that approach."

Investors worldwide seem to agree that, even if the global economy has plunged into a recession, it's likely to be brief and the powerful American economy soon will bounce back.

Last Friday, the Dow Jones industrial average recorded its biggest weekly loss since the Depression, but it rebounded by 424 points on Monday and Tuesday before backsliding by 94 points yesterday. Stock prices in European and Asian markets rose strongly this week.

"Clearly," Shastri said, "some sectors are on the verge of an upswing — companies like Raytheon, Boeing and Lockheed, which you'd expect to benefit from an increase in military spending. On the other hand, the service and entertainment industries are suffering, and the airlines and insurance companies are taking a real beating."

Airline stock prices may never recover unless Americans soon resume their pre-Sept. 11 flying habits, said Shastri, who doesn't see alternate transportation providers benefiting from a decline in air travel."

He and Lehn said they knew of no precedent for what apparently was "terrorist insider trading" on European stock and commodity markets prior to the Sept. 11 attacks. German regulators and bank researchers uncovered highly suspicious sales of shares in airlines and insurance companies, along with major trades in gold and oil markets.

Lehn was chief economist for the Securities and Exchange Commission during the 1987 stock market crash, and sees a big difference between that event and this month's market decline.

"There is enormous uncertainty in the market, and the market does not like uncertainty," Lehn said. "When you get dramatic increases in uncertainty about future earnings due to what's going on in foreign policy, the market tends to devalue stocks across the board, which it has done in the last two weeks.

"The tricky part is that, given there is no well-defined enemy, it's not as if dropping a few bombs will remove the uncertainty. So, it could take a while for this uncertainty to dissipate. I'm no authority on the military, but my guess would be six months to a year."

No foreign markets stand to profit from America's economic downturn, Shastri said.

"Given the power of the U.S. economy and the amount of consumer spending here that other countries depend on, I can't see anyone profiting from this," he said.

"What I can see is that some currencies will benefit, like the Swiss franc, which investors may view as being a safer currency than the American dollar these days. Also, prices of commodities like gold and other precious metals could go up, as people start holding those instead of dollars."

–Bruce Steele

Filed under: Feature,Volume 34 Issue 3

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