Faith in U.S. May Keep Small Investors From Fleeing Stocks

Many small investors are vowing that last week’s terrorist attacks won’t scare them into dumping stocks when the market reopens today. They cite patriotism and faith in the long-term health of the U.S. economy as the reasons they’ll hold fast to their personal investment plans.

“I feel more positive about being an American, about the strength of our country and our economy,” said Joseph Onesta, a Los Angeles-based credit counselor. “We are not going to let this terrible tragedy have more of an impact than it already has.

“My investments stay where they are,” he said.

A poll taken by Harris Interactive in the immediate aftermath of Tuesday’s attacks found that the majority of participants--51%--expected stocks to be a less attractive investment over the next several weeks or months. However, 99% said they did not plan to sell stocks or stock mutual funds in reaction to the terrorist attacks, which killed thousands and shut down U.S. stock markets for nearly a week.

“Panicking doesn’t help anybody,” said Leisel Friedrich, a West Los Angeles investor. “Hope in the future is terribly important.”

It’s unknown whether the resolve of the more than 80 million Americans who are estimated to have a stake in the stock market will hold steady as events unfold in the weeks to come--including the possibility of a full-blown U.S. military response.

Stocks have been falling for a year and a half as the economy has slid toward recession. Even before last week’s terrorist attacks, the news wasn’t good, with August unemployment hitting a four-year high, consumer confidence plunging this month and manufacturing activity marking its longest decline in three decades.

Worse, the economic fallout from the attacks has just begun. Major airlines, anticipating a severe drop-off in air travel, are laying off thousands of workers. Some economists fear American consumers may rein in their spending in the face of an uncertain future.

Signs of skittishness among individual investors were emerging even before Tuesday’s attacks. Stock mutual funds suffered net outflows of cash in July for the first time since March and for only the fourth month in the last 11 years. Early indications were that the retreat was continuing in late August and early September.

Many mutual fund companies and brokerage firms last week took steps to guard against investor panic. Some firms restricted advance buy or sell orders while the market was closed; others allowed customers to place advance orders only with phone representatives--not online or with automated phone systems.

Meanwhile, financial planners say they have been talking and writing to clients over the last several days urging them to stay the course with their long-term investment plans in the wake of the tragedy.

So far, at least, the admonitions appear to be unnecessary.

“For the most part, people are recognizing that their money is in the market for the long term,” said Meloni Hallock, a financial planner with Ernst & Young’s personal financial planning group in Los Angeles. “Some people want a little reassurance, but I don’t see anyone wholesale pulling out.”

Edward O’Hara, a planner from Silver Springs, Md., said he’d heard from only a few clients. And those individuals called because they had issues about specific investments--such as stock in an insurance company that was likely to be hard hit by Tuesday’s disaster.

“They recognize that there may be some short-term volatility because of this, but I think they have a lot of confidence in the country,” O’Hara said.

There is a quiet rumbling among market professionals that they too “should do the right thing” and not participate in any sort of nervous market sell-off, said Gary Schlossberg, chief economist with Wells Capital Management, a division of Wells Fargo & Co. in San Francisco.

“There is a sense that there may be a resolve there to show the terrorist community that our markets are not going to be collapsing,” he said.

Historically, major disasters--ranging from the assassination of President Kennedy in 1963 to the onset of wars--have caused at least a temporary market drop. But the market has often recovered within a few months, Schlossberg said.

Still, the market’s performance during wartime is often dictated by whether the U.S. is winning. After the Japanese attack on Pearl Harbor in 1941, the stock market slid for five months, until U.S. military fortunes in the Pacific improved. The same pattern occurred during the Persian Gulf crisis in 1990-91.

One crucial difference between past crises and now: During past disasters, the stock market typically was open throughout the initial shock and news-gathering phases, giving the fainthearted an immediate chance to panic.

This time, the devastation caused by the attack prevented Wall Street from opening at all, and it has remained shuttered since. By the time trading resumes, it’s possible that cooler heads will prevail, some analysts say.

“I’m not sure, but we could even see an uptick in the market” today, said Don Reiser, president of Ameritas Direct, a Houston-based annuity company.

“To assume that the economic fiber of this country will be lost because someone bombed a building is just not reality,” he said. “The structure of this country is just as sound as it was yesterday. Nothing has changed.”

Investors may be further reassured by the federal government’s efforts to bolster the economy. The Federal Reserve is widely expected to cut interest rates again, and Congress already has authorized $40 billion in new spending for disaster relief and military spending. There’s also speculation that Congress may vote a fresh round of income tax cuts.

Certainly, economics--both personal and national--will play a role in how individual investors ultimately respond to Tuesday’s disaster. But it’s clear that patriotism and a determination not to act rashly will be important factors for the foreseeable future.

“I don’t think the economy is good, but I think the market will recover,” said Bob Byrd, a high school geometry teacher from Indianapolis. “Besides, Americans need to stick together and not let these terrorists take our country apart. If there is a big sell-off, I feel like we are just giving into them. I don’t think that’s the American spirit.”

Rhonelle Runner, a music librarian at Occidental College in Eagle Rock, said she’s not even tempted to sell her stock investments.

“This will probably have a large effect on the economy but a short-term effect,” Runner said. “I’m looking at the long horizon, and I really feel that the best place for my money is where it is.”

Costa Mesa retiree Lee Hinson said his stock portfolio “is already so sick that it can’t even cough,” but he’s going to wait and see what happens before he considers selling any shares.

“Things have to settle down, so I’m going to give it some time,” Hinson said.