(MONEY Magazine) – Prior to the Sept. 11 terrorist attacks, the markets and the economy were already in a period of adjustment--from the unprecedented boom of late 1999 and early 2000 to the subsequent economic slowdown. Then, in the markets, the slow but orderly retrenchment became a seismic sell-off that erased more than $1 trillion in shareholder value in just one week. As Treasury Secretary Paul O'Neill said recently, it will be weeks before we can fully gauge the impact of the attacks on the economy and the markets. Dozens of companies have already lowered their forecasts. Businesses have also eliminated tens of thousands of jobs, pre-emptive strikes against what most say will be an unavoidable, albeit shallow, recession.

What is clear is that it's time to rethink the economics of a short-term focus, one based on quarterly results rather than long-term business improvements. Since the bubble burst last year, many investors have returned to the time-tested philosophy of taking the long view. But others--probably including those who are relatively new to the market and have never lived through a correction before--have held on to the hope of discovering the next Amazon or Qualcomm or devising a defensive portfolio miraculously capable of providing double-digit returns in a down cycle.

It's not that we haven't learned from the past year's setbacks, it's just that adopting a long-term strategy requires patience, a characteristic that became almost anachronistic during the Internet boom. It also requires trust in the basic strength and resilience of the markets, which is hard to hang on to during periods of great turbulence, like the one we're now experiencing. But, ironically, the effects of the terror attack may actually help shift investor expectations to more sensible levels.

Consider where we were before Sept. 11 and where we are now. Prior to the terrorist attacks, the economy had already been struggling to maintain positive growth. Final gross domestic product for the second quarter was recently revised a notch upward to 0.3%--slightly better than anticipated--but down sharply from the 1.3% growth of the first three months of the year. In the aftermath of Sept. 11, the scenario has grown considerably more bleak, at least for the near term. The post-attack sell-off on Wall Street helped push the S&P 500 down 16% for the third quarter--its worst performance since the fourth quarter of 1987. The Nasdaq tumbled 31%, its second steepest quarterly loss on record. Corporate earnings for the S&P 500 are now expected to fall 22% in the third quarter, according to Thomson Financial/First Call. Before the attacks, a decline of roughly 17% had been anticipated. The Congressional Budget Office has confirmed that the fiscal year 2001 surplus will be $32 billion less than originally thought. And the budget surplus projections for 2002 are certain to be revised downward, perhaps to a deficit.

The first full look at consumer confidence following the attacks paints a grim picture. The University of Michigan's Consumer Sentiment Index plunged to its lowest level in nearly eight years. But perhaps one of the most significant results of the destruction will be the impact it has on visibility--the ability to forecast corporate performance with confidence. During the boom, many investors judged companies solely on the basis of their ability to meet quarterly earnings targets. Now companies have an indisputable reason not to make such projections, at least for the next few months. They don't know what effect the attacks will have on their business. And neither do we. So how long will it take for visibility to improve? When do we get our next fix of bullish quarterly earnings targets? Or have the aftereffects of the attack made demand for short-term forecasts futile for the near future, effectively forcing investors to choose between "buying blind" and taking the long view? We don't know the answers yet. What we do know is that expectations--in terms of the economy and earnings--have been ratcheted down fast and furiously.

The market may well benefit from investors lowering their expectations and taking a longer-term view. As Joseph Battapaglia of Gruntal & Co. said recently, "Investors priced the worst into stock prices, which means that expectations are the lowest they could possibly be." When investors feel that way, it doesn't take much good news to start the market moving up again.

In terms of the economy, the policies implemented following the attacks may actually lead to a stronger and faster recovery than initially thought. The World Trade Center attack in many ways crystallized thinking among policy leaders both here and abroad. As a result, the Federal Reserve and central banks around the world have shifted gears fast to provide monetary relief. On the day the markets reopened, the Fed slashed short-term rates by 50 basis points (half a percentage point). On Oct. 2, the Fed cut rates by another half a percentage point. And where gridlock on Capitol Hill was taken as a given, suddenly new legislation for economic stimulus measures has momentum, whether it takes the form of tax rebates, lower corporate tax rates or any of the other options under discussion. In addition, James Bianco of Bianco Research writes that history shows that the public rallies around the President in a crisis. And when the President's approval rating rises--as it is doing now--so does consumer confidence. The rosy scenario sees consumers continuing to spend almost as a form of defiant patriotism.

Other potential sources of strength include a huge gain in government spending in areas such as defense and a new focus on fostering domestic energy sources, benefiting oil and gas drilling companies. In addition, as Edward Yardeni of Deutsche Banc Alex. Brown puts it, companies are "likely to move away from just-in-time to just-in-case inventory management systems. This suggests that inventory restocking and overstocking could be a big source of growth next year." Furthermore, the two keys to strong economic growth remain in place. Inflation is low, and productivity is rising, despite our slower economy.

Yardeni recently cut his estimates of operating earnings for the companies in the S&P 500 to $40 a share from $45 a share for 2001. But he left his 2002 forecast of $55 a share untouched. Mario Gabelli of Gabelli Asset Management is also looking for a bounce next year. "I think the short term is pretty ugly," he says. "But as you look into 2002, [there are] lots of dynamics that are going to help earnings, help the economy, and you are going to get a booster shot selectively for a lot of industries." Gabelli goes on to say, "I think corporations...are doing everything right to position themselves for a very sharp recovery in earnings in 2002. On a long-term basis, profits will grow 6% to 7%. So investors should not expect the halcyon days of the '90s, but very good solid returns after we get through the next 90 days."

Gabelli is far from alone in predicting a rebound in the first half of next year. Before Sept. 11, the prevailing wisdom called for a long and sluggish recovery. Now, many point to the "V" scenario--a sharp rebound. History supports this view. After an initial plunge following a shock, stocks have usually recovered three to six months later.

We in the media also need to shift our focus from the short term to the long term. If investors have grown overly concerned with short-term activity, the media has become absolutely addicted to it. We have a vested interest in a market-centric economy. It makes for a better story. And with the surge in the number of financial news outlets, the competition for good stories has never been more fierce.

Like investors, the media was in a period of adjustment before Sept. 11, from the rally fever of 1999 to the subsequent slump. Now that the world has changed again, we must question all of our previous assumptions. The foremost challenge is figuring out how to judge corporate performance. Prior to the attacks, quarter-to-quarter results--and whether they measured up to the most recent, usually lowered, analyst expectations--had become for many a more important benchmark than long-term prospects and performance. This change may of necessity provide a perspective that is longer, broader, more rational and, yes, more reliable.

Lou Dobbs is the anchor and managing editor of CNN's Lou Dobbs Moneyline.