Stock markets fall with the WTC
17 September 2001
The terrorist attack on the United States on 11 September -- destroying the World Trade Center in New York and damaging the Pentagon -- has shocked the world. Economists are now predicting a global recession as American consumers, the only remaining engine of global economic growth, hold fast to their wallets in the wake of the tragedy. Stock markets the world over plunged even as stock markets in the US were closed over the few days following the attack.
There has been considerable debate among observers over the extent of the impact of the incident on both the world economy and stock markets. While the short-term impact on specific sectors of the economy -- like consumption and travel -- are clearly negative, the medium and long-term impacts are less clear. Many analysts have pointed to the concerted actions of governments around the world to mitigate the effects of the incident, including the announcements of monetary and fiscal stimuli, saying that these actions are likely to minimise the overall impact on the economy.
Morgan Stanley Dean Witter was one of the financial firms badly hit by the attack on the World Trade Center. That did not stop them from giving their regular views in the Global Economic Forum. In the 14 September edition of the Forum, Stephen Roach stated that any "residue of consumer support for the US and global economy -- both for discretionary spending as well as for housing-related activities -- is likely to be a victim of the staggering events of 11 September". On the same day, his colleague Andy Xie suggested that the "total impact on East Asia ex-Japan will likely be 1.2% of GDP over the next four quarters".
However, relief might come from the Federal Reserve. Another Morgan Stanley economist, David Greenlaw, believes that there is a strong possibility that the Fed will cut the federal funds rate target by 50 basis points in the coming days. Xie even suggested that East Asia's "recovery, which we expect to arrive in 2H02, may be more vigorous than expected".
An article in The Business Times today looked at the behaviour of the Dow Jones Industrial Average in the aftermath of major crises in the past. Using data provided by MarketHistory.com, it found that after six selected crises -- from the bombing of the US Navy battleship Maine in Havana harbour in 1898 through to the Oklahoma City bombing in 1995 -- the average drop in the Dow was 3 percent during the first week after the six events. But after six months, the Dow, on average, had moved back into positive territory.
Last weekend's edition of The Asian Wall Street Journal quoted historians as having said that market experience with 28 sudden exterior shocks since 1940 has been fairly consistent. The newspaper quoted Ned Davis Research's findings, for example, that the median first-day decline in the Dow was 1.4 percent. After about a month, it was down a median of 3.7 percent. But after three months, it had recovered all losses to show a gain of 2.1 percent. After six months, the gain was 6.6 percent.
Some analysts have suggested that the impact of this latest crisis on the stock market may be worse than many of the previous crises because of the recession environment that the world is facing today. This may be true for some of those stock markets where recession has still not been fully taken into account. The US stock market, with its lofty P/E ratio of almost 30, comes readily to my mind.
In contrast, Asian markets have mostly already been badly beaten down over the past one year or two. Among Asian markets, Singapore has fared particularly badly. Based on its Morgan Stanley Capital International (MSCI) index value of 173.95 at the close of trading on 14 September, it has fallen a whopping 31 percent since the start of the year, and almost 50 percent since the end of 1999.
Taking an even longer-term view, the MSCI Singapore index value on 14 September is actually lower than its value of 183.64 at the end of 1991. In other words, the Singapore stock market has spent almost a whole decade without producing a net gain. And this is over a period in which Singapore's nominal gross domestic product more than doubled. By this reckoning, the Singapore stock market is undervalued by 50 percent.
So while there is a need for caution in the stock market over the short term, and even over the medium term for certain sectors and countries, most Asian markets -- in particular, Singapore -- have, after the drop last week, probably discounted even the weakened economic prospects created by the terrorist attack on the United States. Barring an escalation of the crisis through, for example, a full scale war involving another major power or a Middle Eastern country -- with its ramifications on oil supply -- further downside risks over a six-month time frame should be minimal.
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