13 years after 9/11, markets face new threat

BY Adam Shell | FROM USA TODAY | 2014-09-11 16:05

  9:56 p.m. EDT September 10, 2014

  It's been 13 years since the 9/11 terror attacks shut down the U.S. stock market for four days and sparked a mini-crash of 12% in the first week stocks resumed trading in September 2001. The resilient stock market has doubled since then — despite two brutal bear markets — and the economy lived on and prospered once again despite the tragic loss of life.

  But even though Osama bin Laden has been killed, the Iraq War is over and terror group Al Qaeda isn't as feared as it once was, the U.S., its economy and its financial system face a fresh threat from Middle East-based militants: the Islamic State, also known as ISIS or ISIL.

  On the eve of the 13th anniversary of the Sept. 11 attacks, President Obama addressed the nation about the emerging threat from ISIL. He announced a four-step plan to combat the threat, including U.S. airstrikes in Iraq and Syria, support for forces in the Middle East fighting against ISIL, counter-terrorism work, and humanitarian assistance. The goal, the president said, was to "degrade and destroy" the "terror group" and make sure they don't pose a threat to Americans on home soil. He stressed that U.S. combat troops will not engage in a ground war on foreign soil.

  The president's address was a reminder to investors that the mathematics of the market and the smooth functioning of the economy and the psyche of investors can be turned upside down with one unexpected event.

  To get fresh insights on how Wall Street and the U.S. financial markets view terror more than a decade later — and to give investors a framework in how to weigh the risks — USA TODAY turned to Lawrence Creatura, vice president and portfolio manager at Federated Investors.

  "It's a story of resiliency," he says. "Economic resiliency and stock market resiliency."

  The first thing investors need to understand is why 9/11 had such a violent negative reaction on the stock market — at least in the short run. (The market, of course, regained all of its nearly 12% drop exactly one month after 9/11.)

  Why stocks went down so much?

  "It was a big hit. Caused by an unknown unknown," Creatura explains. "It was something that nobody saw coming. It was entirely unanticipated by the financial community. A complete shock."

  "Stock prices are derived from expectations of future earnings," he adds. "Instantly, people didn't know what the companies they owned were going to be earning anymore. There was economic fear. And that uncertainty caused stocks to be marked down immediately."

  What triggered the market rebound?

  "What slowly happened in the days after the attack is investors started to figure who the economic winners and losers would be and priced securities more accurately," Creatura explains. "Investors realized it was not going to be an existential issue, that the country was going to get back on its feet, live another day and fight back both economically and militarily. And that gave investors confidence."

  Will a future attack on U.S. soil create market panic again?

  "It would be very unlikely to have the same impact," says Creatura. "The market is much more prepared for terror than it was on Sept. 10, 2001. Investors now know what it is, they know what it looks like, and they know what the economic impacts are. A portion of those fears are in share prices today. Investors understand that it is a less-safe world.

  Is the Islamic State a threat to the U.S. and markets?

  "Absolutely, yes," he says. "It is a new form of threat. One where the (people posing the threat) have U.S. and British passports. That means borders are porous. They have documents to enter the country and create mischief."

  And sow economic fear?

  "Yes, that's part of what terror is," Creatura says. "After the mathematical market impact, the damage also extends to the psychological impact. Investors discount future trouble. Stock prices are driven by sentiment. So if people get scared, sentiment will weigh on share prices."

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