Wall Street has shown resilience to terror

The Insider

Your Money

March 21, 2004|By BILL BARNHART

SHOCK therapy is sometimes recommended, but investors rarely sign up for the treatment.

A long-term graph of the Dow Jones industrial average suggests that the Crash of '87 purged exuberance and set the stage for the '90s bull market.

That sounds smart in hindsight, but I don't recall any experts writing such a prescription in September 1987.

On the anniversary of the U.S.-led invasion of Iraq, you might think financial markets are immune to big disruptions.

After the Sept. 11 terrorist attacks, analysts pondered about how markets would react to future shocks. The consensus was remarkably benign.

Despite President Bush's assertions, 9/11 did only minor, temporary damage to the U.S. economy and prompted just a four-week dip in stock prices, once trading resumed.

As to subsequent shocks, we got a glimpse this month, when it took the benchmark Standard & Poor's 500 index only six days to recover from a mild dip after terrorist bombings in Madrid.

Madrid stocks stabilized, despite the surprise ouster of Spain's pro-Bush government and fears that the incident would retard economic recovery in Europe.

A shock absorber in financial markets appears to be working.

Many potential shocks that play out on CNN last just a few hours in 24/7 markets, precisely because they play out on CNN.

But, as we used to say, "The revolution will not be televised."

In 1998, a cascade of shocks never received the headlines they deserved: a collapse of Asian currencies, Russia's debt default and the meltdown of the Long-Term Capital Management hedge fund.

At that time, China flexed financial muscles by threatening to devalue its currency to match a sliding Japanese yen, recalled Donald Coxe, chairman and chief strategist at Harris Investment Management.

"This was the first time China came on the scene as a factor in liquidity," he said. Fear gripped global investors to the point it was hard to find super-safe Treasury securities to buy and harder to find any other paper that would sell.

Today, global financial shocks are dampened because financial markets are what Coxe calls "the great symbiosis."

The United States, China and Japan are inflating their economies in unison. Low U.S. interest rates aren't driving investors to flee the weaker dollar, because Japan is buying billions of dollars to cheapen its currency.

A few members of the Federal Reserve's monetary policy committee acknowledge that today's low interest rates "have contributed to valuations in financial markets that left little room for downside risks."

But those risks are kept at bay by the allure of low interest rates and the low cost of speculating with borrowed money.

Even debt securities of risky governments trade at lower premiums over U.S. Treasuries than earlier this year.

"To us, this suggests some vulnerabilities," said Brian Gendreau, managing director of Heckman Global Advisors.

"It would be a stretch of the imagination to say there aren't going to continue to be shocks," agreed Leila Heckman, chief executive of Heckman Advisors. "But it might not occur in the same form as it used to."

"What is crucial is that you don't have a break in the dollar," Coxe said.

Bill Barnhart is a financial columnist for the Chicago Tribune, a Tribune Publishing newspaper. E-mail him at yourmoney@tribune.com.

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