Market selloff looks ephemeral

The pancake collapse of the towers of the World Trade Center was mimicked by the stock markets of the industrialized world.

The panic that gripped the world’s bourses in the week following the terrorists’ attack took markets down drastically. Tokyo hit an 18-year low; London, a four-year low; Frankfurt lost 18% of its index value; Paris, 14%. Toronto lost more than 400 points when it reopened, and Sydney, almost 300. And of course the Dow, on reopening Sept. 17, suffered its worst one-day point loss ever — 684.81 points, which took 7% off its value.

But the dramatis personae of the market’s morality play were the same Fear and Greed we have always seen, though Fear had dug into its locker for a mask that hadn’t been seen for a while. And for some reason, the mask scared more theatregoers than it had in the past: the Gulf War that opened the 1990s, and the Soviet Union’s invasion of Afghanistan, which opened the previous decade, had even sent some stocks up in anticipation of heavy military spending.

What is different this time? Notably, both those previous war scares came during a sustained bull market, when the market’s psychology was primed for greed rather than fear. Since the explosion of the dot-com bubble, and the destruction of value in the tech sector — two distinct, but related things — there has been a steady diet of bad market news. Bad news from out there in the real world, the one where people die and other people go to their deaths trying to save them, simply piled on the weight of fear in the market.

Demand for consumer goods is weak and will likely stay that way as the supply of capital moves to savings rather than investments, and as people lose jobs. Demand was weak in 1990 as well, but the markets moved up. Most critically, money is inexpensive: consider how the market drove skyward in 1980 in the face of nominal rates in the double digits and real rates that sometimes exceeded 5%. This time, there seems to be little inflation to fight, nominal rates are near 3%, and real rates close to 1%.

The economic picture, in short, is not pretty, but far from bleak.

The markets’ reaction to the recent events is not comforting to the “efficient markets” theory, because it can be readily agreed that few of the companies on those markets had their fundamentals changed. If it be argued that stocks were overvalued before, then the market was inefficient before; if it be argued that stocks were fairly valued before, then the market was inefficient afterward (and, as this issue goes to press, still is).

Financial markets always respond warmly to unreason. But their twittering flights and shivering dives are not always the contours of the real economy.

One thing can be depended on this time. The First World is not going to go home and hide in bed; even less will the developing countries do that. We are near a point where demand is relatively sturdy.

Some sectors will have problems — airlines, for example, are already cutting back and seeking government bailouts, though the people that run airlines are experienced-enough negotiators that they have probably asked for much more than they really need (and, governments being governments, they may get it).

Casualty insurers, quite obviously, face uncertainty in the value of new claims they may have to pay out as a result of terrorism. But as anyone that’s ever been hit with a liability claim knows, casualty insurance is a business where much of the cost can be passed on to the consumer.

But all in all, most industries face precisely the same markets today as they did on Sept. 10. E-commerce ventures are the farce they always were; high-tech telecoms are suffering; and the “old economy” of making things will be riding out a recession.

It had been popular to say, at the time of the terrorist attacks, that “the world has changed.” No: perhaps nothing has changed except our way of thinking about terrorism, which needed changing anyway.

The lesson may be in the old bromides about “staying the course,” about buying and holding, about diversifying, and about having a readiness to take profits.