The Long View: Financial markets post 9/11
The Long View: Financial markets post 9/11
By John Authers, Investment Editor
Copyright by THe Financial Times
Published: September 8 2006 18:13 | Last updated: September 8 2006 18:13
It has been almost impossible to forget during the past week that the fifth anniversary of the September 11 terrorist attacks is upon us. The many people directly affected by that day’s events have probably had it constantly in mind ever since; and for the rest, there has been a welter of media coverage.
The attacks were aimed, among many other things, at world capitalism, and scored a palpable hit. Those watching as the towers collapsed believed that the world – including the financial world – had changed utterly.
How now to quantify the long-term financial damage?
First, it brought all trading in US stocks to a halt for four days – a remarkable success for the terrorists, in spite of claims to the contrary at the time. Wall Street and the world’s other financial centres have improved their disaster retrieval plans since then and it should be harder in future to disable the market’s infrastructure. But not impossible.
The incident earlier this year when the Tokyo Stock Exchange was forced to stop trading during turbulence in the wake of a corporate scandal showed that world markets can still be dislodged by something much less momentous than 9/11.
Unquantifiably, the perception of such risks thus remains much higher than it was at the beginning of September 2001.
At another level, the businesses most directly affected by the events, such as airlines and insurers, have recovered more swiftly than had been anticipated.
Within a month, the S&P 500 had recovered to its level of September 10. Property prices in Manhattan and in other big financial centres even managed to continue booming for several years. That trumped expectations that the relative anonymity of suburban office locations would begin to seem more appealing.
Then there is 9/11’s geopolitical impact. Oil prices stayed relatively stable for two years after the event, until the growing conflict in Iraq helped to push up crude sharply. The benchmark West Texas Intermediate contract now trades at almost $70 per barrel. At the end of 2001, it was trading for less than $20 a barrel.
As a result, energy companies have far outperformed the rest of the market. The FTSE World Oil & Gas index has outperformed the FTSE World index by 43 per cent since 9/11 – both because high prices have boosted oil companies’ profits and because those same prices have dented profits for much of the rest of the economy.
High oil prices are yet to have an unequivocal impact on economic activity, but that could change. Analysts are particularly worried about the behaviour of US consumers, who use a lot of gasoline and who might be forced to cut their spending elsewhere. If the current geopolitical tensions go to another level – with the current greatest fear for the markets being a US invasion of Iran – the oil price could be expected to rise yet further.
Finally, there is the psychological impact of the attacks.
This was magnified by geography. This atrocity did not happen at a safe distance in the Middle East, but right above the heads of the traders and financiers of the world’s largest financial centre, whose daily decisions move world markets. Their perception of risk appears to have changed greatly during the past five years.
The S&P 500 is up 20 per cent since September 10 2001. But the underlying valuation of the US stock market shows that confidence has gradually eroded.
Earnings per share on the S&P 500 have increased 150 per cent since 9/11. But they have almost been cancelled out by the declining price/earnings multiple. The p/e on the S&P has almost exactly halved during the same time frame – it was at about 35 in September 2001 and is now hovering around 17. This is even though US bond yields, which are usually closely related to stock multiples, are barely changed.
Many factors determine the multiple the market will pay for corporate profits. A heightened perception of political risks is probably one of them. Strategists making presentations now routinely include “political unrest” or “event risk” or “geopolitical uncertainty” among their risk factors, even without naming any specific political risk. They tended not to do this before 9/11.
Other markets show heightened risk aversion. Gold, a classic safe haven, was trading at less than $300 per ounce on 9/11 and is now at $625.
Rallies in commodity prices and in emerging markets, and a reduction in stock market volatility as measured by the Chicago Board Options Exchange’s Vix index, all tend to argue against a rise in risk aversion. But these may also show that 9/11 has demonstrated to US traders that their home market is not immune to the risks that bedevil other parts of the world.
The greatest problem is that it is hard to see how this long-running psychological effect can ever be remedied.
Everyone remembers the date September 11 and everyone has a clear image of what happened that day. But it is hard to imagine any event that could put a similarly decisive end to the uncertainty. There will be no VT Day to end the war on terror.
That in turn means the negative drag that 9/11 has placed on the markets will remain. The markets have, indeed, been changed utterly.
john.authers@ft.com
By John Authers, Investment Editor
Copyright by THe Financial Times
Published: September 8 2006 18:13 | Last updated: September 8 2006 18:13
It has been almost impossible to forget during the past week that the fifth anniversary of the September 11 terrorist attacks is upon us. The many people directly affected by that day’s events have probably had it constantly in mind ever since; and for the rest, there has been a welter of media coverage.
The attacks were aimed, among many other things, at world capitalism, and scored a palpable hit. Those watching as the towers collapsed believed that the world – including the financial world – had changed utterly.
How now to quantify the long-term financial damage?
First, it brought all trading in US stocks to a halt for four days – a remarkable success for the terrorists, in spite of claims to the contrary at the time. Wall Street and the world’s other financial centres have improved their disaster retrieval plans since then and it should be harder in future to disable the market’s infrastructure. But not impossible.
The incident earlier this year when the Tokyo Stock Exchange was forced to stop trading during turbulence in the wake of a corporate scandal showed that world markets can still be dislodged by something much less momentous than 9/11.
Unquantifiably, the perception of such risks thus remains much higher than it was at the beginning of September 2001.
At another level, the businesses most directly affected by the events, such as airlines and insurers, have recovered more swiftly than had been anticipated.
Within a month, the S&P 500 had recovered to its level of September 10. Property prices in Manhattan and in other big financial centres even managed to continue booming for several years. That trumped expectations that the relative anonymity of suburban office locations would begin to seem more appealing.
Then there is 9/11’s geopolitical impact. Oil prices stayed relatively stable for two years after the event, until the growing conflict in Iraq helped to push up crude sharply. The benchmark West Texas Intermediate contract now trades at almost $70 per barrel. At the end of 2001, it was trading for less than $20 a barrel.
As a result, energy companies have far outperformed the rest of the market. The FTSE World Oil & Gas index has outperformed the FTSE World index by 43 per cent since 9/11 – both because high prices have boosted oil companies’ profits and because those same prices have dented profits for much of the rest of the economy.
High oil prices are yet to have an unequivocal impact on economic activity, but that could change. Analysts are particularly worried about the behaviour of US consumers, who use a lot of gasoline and who might be forced to cut their spending elsewhere. If the current geopolitical tensions go to another level – with the current greatest fear for the markets being a US invasion of Iran – the oil price could be expected to rise yet further.
Finally, there is the psychological impact of the attacks.
This was magnified by geography. This atrocity did not happen at a safe distance in the Middle East, but right above the heads of the traders and financiers of the world’s largest financial centre, whose daily decisions move world markets. Their perception of risk appears to have changed greatly during the past five years.
The S&P 500 is up 20 per cent since September 10 2001. But the underlying valuation of the US stock market shows that confidence has gradually eroded.
Earnings per share on the S&P 500 have increased 150 per cent since 9/11. But they have almost been cancelled out by the declining price/earnings multiple. The p/e on the S&P has almost exactly halved during the same time frame – it was at about 35 in September 2001 and is now hovering around 17. This is even though US bond yields, which are usually closely related to stock multiples, are barely changed.
Many factors determine the multiple the market will pay for corporate profits. A heightened perception of political risks is probably one of them. Strategists making presentations now routinely include “political unrest” or “event risk” or “geopolitical uncertainty” among their risk factors, even without naming any specific political risk. They tended not to do this before 9/11.
Other markets show heightened risk aversion. Gold, a classic safe haven, was trading at less than $300 per ounce on 9/11 and is now at $625.
Rallies in commodity prices and in emerging markets, and a reduction in stock market volatility as measured by the Chicago Board Options Exchange’s Vix index, all tend to argue against a rise in risk aversion. But these may also show that 9/11 has demonstrated to US traders that their home market is not immune to the risks that bedevil other parts of the world.
The greatest problem is that it is hard to see how this long-running psychological effect can ever be remedied.
Everyone remembers the date September 11 and everyone has a clear image of what happened that day. But it is hard to imagine any event that could put a similarly decisive end to the uncertainty. There will be no VT Day to end the war on terror.
That in turn means the negative drag that 9/11 has placed on the markets will remain. The markets have, indeed, been changed utterly.
john.authers@ft.com
posted by Carlos T Mock @ 8:03 AM
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