Comment

After WTC Attack: US stock markets are too optimistic.

September 19, 2001

The attack by terrorists on the WTC in New York has made much of everyone earlier analysis irrrelevant. The US stock markets have traded for two days now. Here is our brief observation and conclusions of what is happening. The Dow is down more than 7% since trading restarted on monday, but the market I feel is still too optimistic as the dark genie of bearishness and fear remained bottled up in the lamp. Here are the reasons for saying so: The authorities are preventing market participants from behaving normally. e.g., applying pressure on hedge funds not to short the market. There is a burst of patriotic behavior to support the US stock market, including Warren Buffet. Foreign investors take their cue from the locals. They are not patriotic and they are still trying to make sense of it all. It is difficult to decide where else to send the money. So far, less sophisticated investors believe the historical examples that war is "good for the stocks" to support a hold position are irrelevant because the market has been pre-empted from falling further in point 1 and 2. This is a different kind of war, and the continental USA could be a key battleground. If they maintain moral leadership, the US will win this war eventually, but for now the stock prices are still reflecting too much optimism. The earlier case made here that the Fed might be able to buy enough time to rescue the US economy and market is now a forsaken cause. How long can they hold the US market at these levels? I am not optimistic. Buying opportunities are ahead of us. By the way, most of the upside in bonds that this site has correctly predicted, the unfortunate and despicable attack on the WTC has brought forward much of those gains.

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