September
Out of the Ashes……..
On September 11, 2001 the World changed forever as we witnessed the destruction of the World Trade Center and the destruction of the Pentagon. The actions by well-trained Muslim terrorists can only be viewed as “acts of war”. As Americans deal with the emotional and physical trauma associated with these acts, the New York Stock Exchange remains closed yet anticipates its reopening on Monday, September 17. The U.S. money markets reopened on Thursday, September 13. The financial markets around the world have fallen approximately 12% since the initial Boeing 757 slammed into the WTC.
Leading investment professionals have urged patience and calm during this unprecedented crisis. Logistically, the WTC is two blocks away from the New York Stock Exchange, the financial epicenter for all securities transactions. Precautionary efforts are in place to insure the financial integrity of investors. Yet, a pre-mature move to re-open the markets too soon would not be in the best interest of investors. The devastation and destruction caused by this event remains a far greater concern than whether the markets reopen.
Other events in history have negatively impacted the markets in the past. The greatest drop resulted from the Arab-oil Embargo of 1973 as the market fell 17.9%. Oddly enough the markets fell 34.2% during the month of October 1987 with no events to lay blame. In a recent study by Ned Davis Research, these events throughout the past 60 years signaled an end to an already bad market. Historically, what follows dramatic drops in the market has been steady positive market returns for several years.
In an already over-sold stock market in 2001, the financial markets are poised for recovery. Liquidity supplied by the Federal Reserve is now exceeding record levels. $60 billion in reserves were pumped into the market yesterday. More will be added today in preparation to just what might happen on the reopening. It is our estimate the Fed will add over $200 billion in new reserves by Monday, September 17, 2001. The banking system is intact, the financial markets will remain intact. In a directive issued today, the Federal Reserve will raise reserves to whatever it takes to meet any inordinate demand for money.
On a short term basis, the markets will react. Yet, predicting which way the market will go is very difficult. Fundamentally, the economy is close to turning positive anyway. The Federal Reserve has already cut interest rates seven times since December 2000. The current money rates are reflecting another 0.5% to 1.0% drop in rates this weekend. We anticipate the Fed will formalize another drop in interest rates this week.
If a tremendous drop occurs on the opening, markets will see publicly traded securities trade at deep discounts to any historical prices for most securities. Our guess, which remains a guess at this juncture, is that investment firms are going to greet the opening of the market with a groundswell of support. Mutual funds, large retirement funds, and other sophisticated investors will support the markets unlike any other time in modern history. The surprise will be the resilience of the markets.
Near term support in the stock market, although welcomed by all investors, will be watched closely. Longer term leadership will evolve over time as we emerge from the ashes. Certain economic factors will prevail as Americans return to their basic spending habits. It is too early to determine the longer term effects, if any, on the consumer psyche. These dynamics must be played out first.
The bond market is peaking. Therefore, fixed income participants need to keep portfolios concentrated in the short to intermediate bond Treasury bonds. Oddly enough, during this heightened surge in money supply, high yield, junk bonds will offer tremendous investment returns as excess liquidity flows through their respective balance sheets. In the end, the inflationary impact of the current moves by the Federal Reserve will reduce overall returns of high grade corporate bonds and Treasury bonds.
The broader impact of a 75% drop in short term interest rates since December is going to be far greater than current investor sentiment reflects. The long term effects of these moves will produce very positive investment returns for the investor.
Russell L. Robinson
Robinson Investment Group
5301 Virginia Way, Suite 150
Brentwood, Tennessee 37027
615.242.3447