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America's stock markets power up, and investors try to shake off a tragedy

As US stock exchanges throw open their doors to trading this morning - barring any last-minute hitches - the world watches and waits.

It watches to see how the intricate communications grids that support 21st-century trading hold up.

It waits to ensure that the tragedy that engulfed the World Trade Center complex last week does not rip apart the global community's most important financial markets, send stock prices plummeting, and exacerbate the United States' economic downturn, just as some were citing small signs of recovery.

Anecdotal evidence and at least one poll hint that small investors, at least, may take a measured approach, rather than panic. Still, one week has been too little time for most to process the enormity of this blow.

The Sept. 11 attack hit US finance hard. The area around and including the twin towers houses many of the nation's most important financial players, including the New York and American

Stock Exchanges, American Express Co., Bank of America, and Morgan Stanley Dean Witter.

Bond house Cantor Fitzgerald, which was located on the upper floors of the north tower, normally handles about one-fourth of all trades in the $3 trillion government bond market. It is believed to have lost 70 percent of its employees.

Yet, based on the performance of overseas stock exchanges last week - particularly in Europe, where markets rebounded somewhat after initial dips - there is a perception among many New York analysts that the US equities markets will at least hold their own.

The top theories coming into today: Losses could be limited, with only a slight market drop, or the markets could even creep up amid a buying rally.

Even if the market does post early losses, it is expected to stabilize later this week, as has been the case in past economic and political crises, says David Wyss, chief economist for Standard & Poor's Corp., in New York. "We think it will open down, but not in a [financial] disaster," says Mr. Wyss.

"There may be some selling when the market opens, but we're not expecting it to be so extreme" as to push the overall economy sharply lower, says Cynthia Latta, an economist with DRI-WEFA, an economic consulting and forecasting firm in Lexington, Mass.

What the crisis showed

Last week's destruction is "horrible on a personal level." she adds. "But we do not think that it will prove to be as horrible on a financial level."

Historically, "down and up" has been the pattern for financial markets in military-related crises - most recently the Gulf War - notes Charles Kadlec, managing director of investment firm J. & W. Seligman & Co., in New York.

The scale of last week's attack is recognized as unprecedented. But from the week before Pearl Harbor, in early December 1941, to the middle of 1942, the stock market fell. And it then began to rise as the US notched repeated military victories. By the end of World War II, in 1945, the market had risen 60 percent, Mr. Kadlec says.

A crisis such as last week's terrorist action demonstrates the importance of investor strategies designed to withstand financial shocks, Kadlec says, by keeping a broad base of holdings.

No matter how early trading goes, several key factors already stand out:

• The infrastructure of US financial markets is resilient - and essentially intact. Despite a loss of power and telecommunications lines, all US exchanges will soon be functioning again. That does not mean, however, that communications links will be fully restored. Initially, "it could be very hard just to make a stock trade," says Wyss. Even if you can get through by phone or computer, you will still have to find a buyer for your security, which may not prove easy.

• There has been a remarkable show of unity among government regulators and private US financial institutions, says Hans Stoll, director of the Financial Markets Research Center at Vanderbilt University, in Nashville. Other stock markets that could have opened - such as the electronic-based Nasdaq market - deliberately held back operations until the giant New York Stock Exchange was again functioning.

Officers of the various exchanges have been in close contact with one another. The Federal Reserve has committed more than $70 billion in liquidity to keep global markets functioning, also signaling that another interest-rate cut is imminent.

Meantime, the giant US bond market, as well as Chicago's commodities and options exchanges, have reopened with relatively calm trading.

• Global stock markets didn't implode, despite a down week overall (see chart, at right), suggesting that the world investment community will not be intimidated by terrorism - or the threat of a major US market sell-off. While Japan's market took the biggest initial hit, European bourses were up modestly mid-week, but they fell sharply Friday, which led to some concern.

• While some stock sectors may be initially hurt in the US - the airline industry and property and casualty insurers, for example, who face staggering losses - other industries are expected to be given a boost, including defense, energy, consumer stocks (such as food and pharmaceuticals), and possibly precious metals, including gold.

Most analysts expect the market - and the economy - to be in substantially better shape by late 2002.

"Even if the market opens down, it should eventually turn back up," says Mr. Stoll, who notes that experience shows "tragedies tend to have a very short-term impact on trading."

While large financial houses may use quick computer programs for initial heavy trading, which may contribute to volatility, there is evidence that average investors are not going to dramatically alter their investment portfolios.

Investors may hold firm

According to a poll last week by Harris Interactive, even though most Americans believe that the market may drop in the short term, 99 percent of respondents said that they would not sell stocks that they owned.

Nor would the majority - 77 percent - spend less or save more than they normally would. That could be especially good news for the overall US economy, since consumers account for the lion's share of economic growth.

"Don't panic and don't speculate," says Peggy Farley, who heads up Ascent/Meredith Asset Management, in New York. "Wait and see how the market does before committing [cash]."

Participating in the market with confidence is fine, other analysts say. But they add that investors should not overextend in trying to make a political statement.

"One thing that investors should not do is use the stock market as some form of patriotism," insists David Levy, chairman of the Levy Forecasting Center, in Mt. Kisco, NY. In other words, they should continue to ensure that their personal portfolios correspond to their personal financial goals.

"You can never manipulate the market," says Mr. Levy. "The market will go where it needs to go" to properly reallocate financial assets among competing sectors and firms.

Levy advises caution: "Investors should see the market as a dangerous place," given still high valuation levels, and current volatility. That danger will fade as market corrections take hold.

Investors should take a wait-and-see attitude, says Graham Tanaka, president of Tanaka Capital Management in New York. "Small investors are more likely to make a mistake" if they rush into emotion-based trading, he says.

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