Canceling a coming family trip to the Caribbean after last week's terrorist attack was an easy decision for Heather Knowles: The risks weren't worth it, at least not now.
And as a computer manager with a finance background, Knowles is a businesswoman who understands the implications for the stock market of millions of consumers, like her, pulling back on spending.
That didn't stop her from marching into a Michigan Avenue Charles Schwab office Tuesday--one day after the Dow Jones industrial average's biggest point drop ever--to open a college savings account for her young daughter. She described herself as a conservative investor, but a confident one.
"I'm not at all nervous about the market," she said. "I know it will be a long road to recovery, but I'm still young and can work, and I believe the economy will pull together."
Investors' mettle is about to be tested like never before.
Stocks stabilized after Monday's wrenching fall, but closed lower again Tuesday, with the Dow failing to hold a more than 100-point gain.
Overall, there is an emerging view that last week's tragedy will bring the country into deeper economic trouble than it already was, but that government and private rescue efforts will form the catalyst for a rapid rebound: The elusive V-shaped recovery, suddenly, is back in the picture.
Despite some ominous short-term signals for the economy and the threat of more shocks to the stock market, the U.S. now appears to "be heading for a more classic business cycle than appeared likely only 10 days ago," notes David Hale, Zurich Financial Services' chief economist in Chicago.
Nevertheless, many investors are scrambling to hedge investments with options to sell stocks as the outlook surrounding a U.S. response remains unclear.
"Investors have every reason in the world to be worried about what level the market needs to go to begin moving back up," said Ned Bennett, chief executive of OptionsXpress, an online stocks and options brokerage. Options are securities contracts that give the buyer the right, but not the obligation, to buy or sell a stock at a given time.
"We've seen a tremendous influx of customers moving assets into options as a defensive strategy," Bennett said.
How to make sense out of the conflicting signals?
Start with a historical perspective.
Perhaps paradoxically, markets tend to rebound strongly after tragedy: The cumulative three-year return on the S&P 500 after the 1941 attack on Pearl Harbor was 81.4 percent; after Iraq's 1990 invasion of Kuwait, 57.7 percent; and the 1993 World Trade Center bombing, 56.6 percent.
Many market analysts, for example, have said they believe the quick, relatively painless victory by U.S. forces in the Persian Gulf war sowed the seeds of optimism that led to the historic bull market of the 1990s.
The current situation, however, has similarities and differences from these precedents.
The attack was on American soil by an ill-defined group, suggesting a swift, clean response could well be problematic. It also came at a time when the broader economy already was severely troubled, though not inflationary. But the economy was weakened in the early '90s as well, and many feared the U.S. buildup to evict Iraq would result in a protracted conflict.
"The gulf war was the shock that led to the recession, but then we had a tremendously long recovery," notes Susan Sterne of Economic Analysis Associates.
A strategic, isolated attack in response to last week's devastation might not spin off the economic benefits of a military buildup, but markets clearly await a next move, said George Constantinides, a finance professor at the University of Chicago.
"If the disaster stops here, people will internalize the event and move on. But if this continues on" with a prolonged military involvement or more attacks, "no one can tell," he said.
All of this uncertainty is why investors are hedging their bets with more options, but it also is oddly giving investors some economic certainty, said Hale.
"Clearly we now have a recessionary shock," he said, noting that the downturn in airline and hotel business alone "will knock a half point off GDP."
And that could lead to broad stimulative measures aimed at propping up other industries, including information technologies, he said.Copyright © 2014, Los Angeles Times