Cents and Sensibility
Cents and Sensibility
Question: If America goes to war, how is the stock market likely to respond? Even with war, market
revival will depend on economyAnswer: The immediate stock market reaction to the threat of war has almost always been negative, and this time was no different. Stock investors do not like uncertainty, and there are few risks that can compare to the risks presented by war. However, a prolonged "war on terrorism" shouldn't be compared to World War II, which converted nearly the entire economy over a period of years to the war effort, or Vietnam, which led to massive increases in government spend- ing to fight a war and develop new social spending programs at the same time. This campaign can best be compared to the Cold War, where there is a sense of uneasiness, but life and the economy go on. The stock market should resume its normal upward path when the economy recovers.
Q: Why has the attack on America had such an impact on the economic growth outlook?
A: There are two reasons why the attack has changed the near-term outlook for the economy. First, there is the direct impact on industries such as insurance, airlines and tourism. Estimates of losses range from $20 billion to $40 billion for property and liability companies; and from $2 billion to $4 billion for life companies. Estimates of the total direct cost of the terrorist attack range from $20 billion to $100 billion. That compares to natural disasters such as the Northridge earthquake near Los Angeles in 1994 ($23 billion) and Hurricane Andrew in Florida ($40 billion).
The second impact is the psychological impact and is more difficult to measure. The immediate reaction on the part of consumers was to stay home and stop spending. While we can expect an ultimate resumption of more normal buying behavior, it is reasonable to expect more cautious spending on the part of consumers in the months ahead due to concerns about job security and the future direction of the economy.
The good news is, the federal Government already has begun to respond, approving a $15 billion aid package for the airlines.
The Federal Reserve reduced interest rates by one-half point Monday, its eighth cut since January. Other central banks around the world followed suit.
Economists at Goldman Sachs estimated the combined total of U.S. spending increases and tax cuts next year could reach $140 billion, including the $40 billion spending package approved two weeks ago. That would equal 1.5 percent of gross domestic product.
These moves are encouraging and should help cushion the impact of this terrible tragedy.
Guy Steele is a financial planner and head
of the Pali Palms office of Edward Jones. Send
planning and investing questions to him at 970
N. Kalaheo Ave., Suite C-210, Kailua, HI, 96734,
or by email at: gsteele2@pixi.com