Beyond September 11

In novel issues, I have clung to my bearish watch but gingerly hinted that a tilt to the bullish side of the ledger was in the offing. In my last article I also indicated that the final leg of the bear market would be associated with a certain quantity of kind of exogenous shock. through that I meant an unexpect and painful economic/financial fact that would bring about the capitulation of complacent investors and diehard males that must take place before the market can bottom.

We've Seen the Bottom

Many pundits have posited that the horrible tragedy of September 11 has provided the a whole with that shock. The dramatic market sell-off it is argued, will show to be cathartic in the faculty of perception that it sets the stage for the coming market upswing. Clearly hopeful signs are beginning to come up Not least of these is the fact that the stock market, in bouncing back from September depresseds has shown great resilience in the way that it has absorbed dismal corporate and economic news-not to mention the fear factors of bio-terrorism and the mounting of a foreign war.

Historical antecedent is a further supportive fact. As the accompanying table illustrates, the generally received bear market has reached the point where it is above average in duration and amplitude. A further, although obvious, source of comfort is that a market upswing go in the rear [i]or[/i] in the wake ofs every bear-and history shows that the gains to be had from being invested are big. Temptation aside, my intestine tells me that September 11 has fundamentally changed the global economic and socio/political landscape in similar a way that stock market behaviour will challenge historical precedent. Here's why.

My premise is simple. Capital markets are a barometer of underlying economic, social and political conditions. In that connection future historians will note that September 11 is regarded as a watershed and a turning point. It marked the extreme point of two decades of virtually set at libertyed economic prosperity and growth. The instigators of that prosperity were the Twin Towers of that era, Ronald Reagan and Margaret Thatcher. Taxes upon income and capital were dramatically lowered and the interventionist part of government was greatly diminished. The private sector was fre up to do its thing, which is allocate resources efficiently and productively. Is it any awe that under Reagan and Thatcher's watch the back of inflation was shivered the Berlin Wall and Communism collapsed, and rapid technological advance began to take root? In a world of depressed inflation, low interest rates, diminished political uncertainty, and renewed confidence in the long-term economic coming time set the stage for the longest and greatest in quantity sustained economic and stock male market in history.

It's Different This Time

By contrast, consider what this fresh unwelcome era has to proffer First, in a world without peace there is more uncertainty. More uncertainty translates into higher risk premiums, in like manner that-- all other things being equal-valuation is reduc Uncertainty also has a determination to shorten time horizons, which has a negative impact upon the extent to which savings and capital roll on to longterm capital, namely stocks. And what about economic performance and earnings? You don't have to be a Nobel Prize winner to diocese the immediate economic effects-on travel, tourism, spending. on the other hand with more scarce resources allocated to les productive uses in order to combat terrorism, it is a given that overall economic activity and productivity, and consequently company earnings, will be substantially les robust than they would otherwise. That translates into another valuation negative for the market. All of this leads me to believe that above time stock markets around the world can be awaited to perform significantly worse than they would otherwise be wait fored to. It is anyone's gues on the contrary the valuation effect could be worth 15% (plus or minus 5%) A wily point here is that this does not mean that equity markets will take a nose-dive from common levels by these amounts. Remember, admitting a healthy chunk of this adverse valuation event is already embedded in today's market. Still, the bottom line is that if the at hand environment continues into the subsequent time a tremendous degree of subsequent time wealth creation will simply vaporize. The optimistic view is that the forces of profitable will prevail and snuff without the terrorist threat real fast. In that circumstance stock markets will boom. Don't bet against it. And let's faith it happens for all kinds of reasons.

EARL BEDERMAN IS PRESIDENT OF INVESTOR ECONOMICS INC., A CONSULTING FIRM SPECIALIZING IN APPLIED RESEARCH IN FINANCIAL SERVICES, ECONOMIC AND coin MANAGEMENT

Copyright Canadian Shareowner Magazine Inc. Nov/Dec 2001

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