column from toronto star today...an optimistic look, plus some optimism for the internet sector...
\The Sept. 12 headlines in our local newspapers get right to the point. Day of terror and A day of infamy, they proclaim.
Like it or not, the United States and the Western democracies are at war against international terrorism. The horrific events of Sept. 11 will affect investors, perhaps for several years, but in the end our society and our secure way of life will be preserved.
No one knows how long this war will last but in the interim, individual investors may have to rethink their short- and long-term investment strategies.
The short-term impact of the war on terror:
Investors are now involved in a commercial crisis. A commercial crisis (as opposed to a political crisis), is a negative economic circumstance that may be caused by earthquake, terrorism or war. It can affect the ability of various business enterprises to meet their financial obligations.
A crisis can persist for days, weeks or years. When a crisis becomes apparent, it may cause a panic.
A panic is the sudden flight of a large number of people caused by an overwhelming fear. The panic is short-lived and it may actually create an opportunity for those who do not follow the crowd.
Eventually, the panic subsides but the crisis may remain. In the case of investors, history has shown that a crisis-induced panic is a good time to remain invested in equities.
The following crises and their resulting selling panics gave way to higher stock markets within one month of the panic event or reaction period:
Pearl Harbor, the Korean War, the Cuban missile crisis, the JFK assassination, the U.S. bombing of Cambodia, the Arab oil embargo, the 1987 financial panic, the World Trade Center bombing and the Oklahoma City bombing.
One notable exception was the fall of France in the spring of 1940. One month later, the Dow was unchanged but then rallied to post a three-month gain of 8 per cent.
According to Ned Davis Research Inc., the average six-month Dow returns following 27 panic events in the 20th century was about 12.5 per cent.
Our present crisis may result in a temporary loss of confidence in financial assets as consumers divert spending to only the necessities of life. The loss of life and property will result in many casualty insurers being liable for billions of dollars in claims.
The central banks will flood the financial system with money to restore confidence and liquidity.
Oil and gold prices may spike higher, the shares of banks, brokerage, insurance and consumer stocks may fall. The shares in energy, gold, metals, technology and defence contractors may rise. Some influential analysis may predict a global recession.
The longer-term impact of the war on terror:
Central bank intervention restores liquidity and confidence in the financial markets. Orderly stock markets calm investors and consumers unleash their postponed spending on luxury and durable goods. A recession is avoided.
Financial and consumer shares rally. Inflation rises as a wartime economy is primed by central banks fearful of recession. The stock markets post strong advances. Commodity prices and interest rates rise and then, two possible long-term themes begin to evolve.
The North American trading partners may quietly undertake a new agenda. They may strive to reduce "foreign" dependence on energy and strategic materials. Immigration from selected non-English-speaking countries may be restricted. Technology information-sharing with selected non-English-speaking countries may be restricted.
Small domestic technology companies will get preferential treatment from governments and domestic multinational corporations. North American corporations will divest themselves of investments in countries deemed to be anti-democratic or ruled by oppressive regimes. The losers will be the emerging markets.
A move by governments and large corporations to decentralise their operations will spawn the new Internet. These entities will disperse their assets and management teams to ensure that an event like an earthquake or act of war is not fatal to their operations.
The new Internet will be dominated by firms that will need new hardware and security software. The technology stocks will emerge as the leaders of the new economy and many indices could advance to their post-March, 2000, highs.
Tough it out and be there. |
