Aftermath of Terrorism

By Scott "The-Strategist" Fullman
September 16, 2001

As commuters headed to work and brokerage firms began to get ready for another trading day, terrorists struck several landmarks in the United States, toppling the towers of the World Trade Center, killing thousands of innocent people. These events caused the U.S. equity markets to close for the longest period since the market crashed in 1929.

The proximity, of what once was the greatest symbol of capitalism in the world, to the location of the financial markets and the headquarters of many firms, was very close, as illustrated on the map above. Damage was not only caused to nearby buildings, but along many streets in the downtown area. The collapse of the towers caused the Richter scale to jump to 2.5, spilling debris over the financial district, closing streets, buildings, and mass transit facilities in the area.

The New York Stock Exchange (NYSE) will open its doors for trading today, but the American Stock Exchange (ASE), located just one block away, will not open as windows were blown out and debris litters the roof and surrounding area. In fact, the west side of the financial district will remain closed, at least for several more days, as the cleanup continues.

The ASE is implementing contingency plans, moving equity and Exchange Traded Funds (ETFs) to the floor of NYSE. Options trading is being relocated to the Philadelphia Stock Exchange (PHLX).

Traders, Specialists, and Market-Makers from both the NYSE and ASE, as well as NASDAQ Market Makers, are adjusting to communication and utility problems. The offices for many of these companies, normally located in the financial district, are moving to backup facilities, new working space, or are sharing offices with competitors. This illustrates the strength and confidence of the professionals and their firms in the equity markets.

During the past days, there have been many forecasts as to how the market will react to the devastating events. Some believe that the markets will initially open lower as investors lose confidence, while others believe that the markets will be relatively stable. There are also some who believe that investors have had time to react to the attacks by terrorists and that they will focus on business as usual.

The one thing that I believe we can all expect is that it will not be business as usual. However, it is very difficult to predict which direction the markets will open, how great the movement will be, or when a reversal can be expected.

There are some facts that should help to reassure investors and traders ahead of and during the next several trading days. First, the Federal Reserve has been increasing the supply of money, keeping liquidity in the system. Second, the Securities and Exchange Commission (SEC) is easing some rules, including the restrictions on companies repurchasing their shares. Third, the Fed Funds rate has dropped sharply, indicating that the Fed will most likely cut short-term interest rates again at its meeting on October 2, and may even act sooner.

Depth of market liquidity in the stock and options markets is anticipated to be scaled back, as traders and other professionals work around some of the handicaps that they now face. As a result, volatility levels are expected to initially rise, increasing the time premiums for puts and calls.

We suggest that a defensive posture be maintained on the markets at this time, as uncertainties and short-term liquidity/volatility movements affect on stock prices. Many companies may support their shares, creating a support level for the markets.