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What Will Happen When the Markets Open?

By Rob Walker
Posted Wednesday, Sept. 12, 2001, at 10:30 PM ET

The U.S. markets remain closed today, following yesterday's horrific events in New York and Washington, D.C. But it's inevitable that some cogs in the vast machinery that is the global economy have continued to grind forward. Markets are markets, and it was with their unique lack of sentimentality that, where they could function, they functioned.

In London trading, oil prices spiked to $31.05 a barrel (before closing at about $29, up around 6 percent), and gold prices jumped as well. In wire stories, observers often used the word "panic" to characterize the message these markets were communicating. The London FTSE took its sharpest one-day drop since 1987. Airlines and insurance firms traded in Europe (Air France, Lufthansa, AXA, Zurich Financial) have not surprisingly traded down quite a bit.

What will happen when the U.S. markets reopen? Those who cared to venture a guess speculated that when U.S. equities trading resumes, it will be "terrible" or "awful." On CNBC yesterday, Jeremy Siegel, the Wharton professor and stock market expert, suggested that the sooner the markets open, the better, since a longer delay means more uncertainty and thus a greater chance of an overly panicky response when trading does start again.

The thinking, repeated by many observers both yesterday and this morning, is twofold. First, basic psychological factors would come into play. Second, the economy already appeared rather fragile, and it has been widely believed that surprisingly resilient consumer confidence was the last bulwark against a true recession. If these events undermine consumer confidence, that bulwark would crumble. (To me this means that both aspects of this theory are ultimately psychological.) In addition to drops in spending on air travel, one market watcher tells the Wall Street Journal, some consumers might now decide to "spend less on big-ticket items such as autos." The chief economist for Wells Fargo is quoted in several places speculating that "a full-blown global recession is highly likely."

Do you believe that this latter scenario—a lasting, across-the-board pullback in day-to-day economic activity—is likely? I don't think that I do. Maybe I'm being naive, but it seems to me that, speaking broadly, the American economy has not been fundamentally altered. It's one thing to acknowledge that American life faces a new kind of threat, but some of the theorizing about the economic consequences implies not just a threat but a flat-out defeat.

Obviously certain short-term disruptions are happening now, and that will be reflected in the GDP. But looking out at a longer time horizon, the most extreme prognostications seem more like expressions of panic.

Today several of the European markets have made mild moves into positive territory. Reports this morning are that trading may resume in the United States tomorrow, and a new line of thinking is emerging: that the delay in reopening the U.S. exchanges may result in trading that's actually less volatile, not more so, as participants in the markets will have had more time to digest the news and avoid extreme responses. Whatever the immediate market reaction—even if it does gap down severely at the open—I doubt it will tell us much about its ultimate reaction over the days, weeks, and months ahead. Actually, even as I'm sitting here typing this out, someone on CNBC is using the words "buying opportunity."

All of this, of course, is essentially a side show, even if the catastrophe's ground zero was also ground zero of the world markets. And really, I find it difficult to maintain much interest in the reaction of the stock markets at the moment. I would go along with the view of an equities salesman in Europe quoted by Reuters: "Really, a lot of analysts are wondering what the point is when people are dying …"

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Reader Comments From The Fray:


The possibility of severe market discontinuity is based on two assumptions: 1. this is an act of war 2. wars aren't over in a day.

Lets examine these two pillars of today's conventional wisdom, and see if they hold up.

1. Is this an act of war, or a single extraordinary gesture? War is a conflict between societies that involves more than one encounter. Single encounters are called assaults, skirmishes, threats. Conflict between entire societies and a few enemies is called rebellion, defiance, or criminal violation of convention. As a conflict between societies, you must be able to identify the societies, and determine what degree of parity exists between them. We don't have this information. We don't know if we are facing rebellion, defiance, or criminal violation of social trust.

2. If it were war, in fact, involving enemies on a scale of entire societies, a nation or more, for example, then what next? Does the U.S. declare war, or simply strike and retaliate and return insult and injury to the perpetrators? What if there are no other gestures of this nature? What if there are no more shoes to drop?

Real war is good for business, and all markets will be lifted by the boon to industries created by the vast consumption of arms and materiel.

Absent war, we just have a growing sophistication among the international criminal class, which isn't likely to impact markets.

--Zeitguy

(To reply, click here.)

 (9/12)

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