NEW YORK (CNN/Money) - It was cool and dry that first morning back. The roads were blocked, the subway wasn't running, and so they walked -- down Broadway until the barricades pushed them east at Chambers, then on down Nassau and so to the corner of Wall and Broad the Exchange sits on.
Everybody knew somebody. Nobody knew what was going to happen next.
None of the people heading down to Wall Street Sept. 17 knew the market was about to go on a bizarre round trip. Many would have been surprised to hear that by spring stocks would be significantly higher than they were before Sept. 11. If you told them that the market would then turn around and dive to fresh lows -- and that this would happen even though there would be no subsequent attacks and the economy showed surprising resilience -- they would have just shaken their heads.
| * One month gain from 9/10/01 through 10/10/01. One year gain through 8/30/02. |
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It's hard to get your head around the idea that, through the lens of stock prices, things today are even darker than they were in the days following Sept. 11. Even now, after the market's recovery from its summer lows, the S&P 500 index is below its low of last September.
"This has been a completely bizarre year in financial history," said Hugh Johnson, chief investment officer at First Albany. "It didn't conform to the way markets and economies usually work."
The way it's supposed to happen is that when the economy gets better, stocks get better, too. Coming off the trough of the last recession in 1991, for instance, stocks never looked back. But this time around, investors chose to ignore the old playbook and sell. Even now, uncertainty over the market's direction reigns. Stocks are lower, but investors come to see valuations as less cheap than they did following Sept. 11. And even though last year's fear of a follow-up terrorist attack has so far not been realized, Wall Street is as jittery as ever.
So, what happened?
"It was three things," said Jim Volk, head of institutional trading at D.A. Davidson. "An unsettled international situation, a lack of confidence in corporate America and the concern that the economy isn't going to turn around."
The terror threat
The Dow hit its high for the year March 19. Two days later, a suicide bomber in a crowd of shoppers in Jerusalem killed three people. The next week, twenty-nine people died after a suicide bomber set off a blast at a Netanya hotel. Israel's response was furious -- and decried as heavy-handed internationally.
The violence reminded investors of the Middle East tensions that had led to Sept. 11. At the same time, investors remembered how vulnerable we are: How can you stop an attacker bent on suicide?
"One thing that's changed in this business since Sept. 11," said Kirlin Securities chief market strategist Tony Dwyer, "is the ability to have confidence in longer-term positions. People believe inevitably there's going to be another attack."
It was a dangerous spring, but the intensity of the violence did let up. (So did the tension between India and Pakistan). Investors shifted their focus back home -- and found more to worry about.
The crooks at home
Ever since Enron's collapse in December, the market took a cockroach-theory view of corporate misdeeds: Where there's one, there's more. And the scandals kept coming: Qwest, ImClone, Global Crossing, Adelphia, Tyco and Dynegy.
But WorldCom took the cake. When it uncovered $3.8 billion in expenses fraudulently booked as capital spending in late June, investors threw in the towel on trusting Corporate America.
"It left you with only your mom and your basketball coach as the people you could trust," said Charles Crane, strategist at SBSF Capital. "Bad news was treated horribly and good news was treated with a high degree of skepticism."
In the four weeks that followed the WorldCom revelations, the Dow fell 1,580 points.
Double-dipping is rude
That slide wasn't just about investor distrust of corporate accounting, of course, but also economic worries. Beginning in the spring, signs emerged that the recovery was losing steam. That wasn't unexpected -- the recession hadn't been deep, and recoveries from mild recessions are mild.
But the unsettled global situation, the worries about corporate accounting and the fall in the stock market began to affect the economy. Businesses especially pulled back and worries that the economy could dip back into recession came to the fore. As July progressed, investors pulled back sharply, not just from stocks but also from the corporate bond market. The threat of a credit crunch, when even solid companies can't get money, emerged. As the fear hit a fever pitch, the market dropped to levels not seen since 1997.
New beginnings?
Stocks lurched back from July's abyss, but it's unclear whether they're just taking a breather before diving to new lows or if the oh-so-elusive bottom had finally arrived. Some big fears, like a credit crunch, didn't happen. A measure of confidence was restored when hundreds of CEOs swore to the accuracy of their companies' results Aug. 14. In the perverse way these things work, the recovery in stocks alleviated some of the fretting over the economy.
Still some investors remain incredibly cautious.
"Things I thought were a value after 9/11 are even cheaper now, but I just don't have the nerve to go back in," said Brett Gallagher, head of U.S. equities at Julius Baer Investment Management.
Gallagher bought airline stocks last fall, for instance, and cashed out earlier this year. Now stocks such as Continental are much lower than they were then, but with US Airways' Chapter 11 filing and United Airlines on the brink, he thinks the risks are higher. And given what he's learned over the last year about the quality of company earnings, he thinks stocks in general aren't cheap.
Others, like Aeltus Investment Management strategist Jim Griffin, think that in the months to come things will get better. But he worries about exogenous shocks -- particularly what might happen if we go to a war with Iraq.
"We're going to be sorting out favorably on the economy and earnings," he said. "The risks are still associated with things where we don't know what the heck is going to happen, like the Middle East and Iraq and all that."
For the time being, life is back to normal on Wall Street, sort of. The barricades got pulled away, the trains started running again, stores and offices reopened. The smoke that hung over the financial district through the fall eventually cleared. A year has cycled by and with it a year's worth of birthdays and anniversaries, holidays and fishing trips. Everybody knew somebody.
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