Tragedy, such as that experienced in the United States on September 11, 2001, brings the
need for perspective on the market. One must keep focus on the relative — as opposed to
absolute — measurements of the market in view of performance and fundamental (revenues
and earnings) strengths and weaknesses to maintain sanity and rationality. [Note, for example,
that fire engines in Saudi Arabia are painted green. Who is to say that fire engines should
be red or, for that matter, any particular color? Moreover, the Saudis are our allies now, yet
the September 11 terrorism may be connected to a renegade Saudi in Afghanistan.]
There are two ways to assess the third quarter, retrospectively. The first way — appropriate
to an investor seeking to understand fundamentals — is to study the two-month period prior
to September 11. The second way — appropriate to a forward-looking investor accounting
for the effects of the event — is to study markets in the aftermath.
Cumulatively, the quarter was the worst since 1987. But are the dismal returns due to the
tragedy or to fundamental weaknesses? We believe the latter. We have known for some time
that earnings were slipping, against the backdrop of falling interest rates. Including the
50-basis-point drop on October 2, rates have dropped nine times in as many months.
Prior to September 11, there were signs of economic recovery. The Index of Leading
Economic Indicators (LEI) Index was in an uptrend, suggesting that the economy would
improve three to six months out. Bush’s tax cut was in place, and taxpayers were receiving
rebate checks. Manufacturing appeared to be bottoming, although layoffs still occurred. And
consumers — although still leveraged — were buying houses and large ticket items.
After September 11, any recovery is possibly pushed out at least three months, as suggested
by Treasury Secretary Paul O’Neill. Recovery in sectors such as technology is not expected
before the second half of 2002 and into 2003. Corporate earnings look dismal for the rest of
this year into the first quarter of 2002. Best-performing industry groups now include:
electronic defense, long distance telephones, insurance brokers, gold, general merchandising
and healthcare. Economic statistics show that consumers could be weaker now, because of
layoffs, lack of confidence and lack of security.
It is possible that the market will stick to revenue and earnings fundamentals. We believe that
these fundamentals are subject to increasing difficulty in the next two quarters but that by
mid-2002, we will see a return of confidence and revenue-generation.
As we look through the smokescreen of September 11 and into 2002, interesting values
present themselves. Of course, value is also a relative measure. Investors need to look for
substance over form and not get caught up in superficial issues, like what color to paint the
fire trucks.
|
Before and after 9/11 Tragedy
|
| Indexes |
Before* |
After** |
3Q*** |
| Dow Industrials |
-8.5 |
-7.9 |
-15.8 |
| S&P 500 |
-10.8 |
-4.7 |
-15.0 |
| S&P 500/BARRA Value |
-12.0 |
-5.1 |
-16.6 |
| S&P 500/BARRA Growth |
-9.6 |
-4.3 |
-13.5 |
| Nasdaq Composite |
-21.6 |
-11.6 |
-30.7 |
|
Source: U.S. Global Investors research
*6/29/01-9/10/01
**9/10/01-9/28/01
***6/29/01-9/28/01
|
|
Investment Professionals 
