Interesting Analysis of Post-9/11 Stock Performance

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http://www.marketwatch.com/news/story/less...745F387A2AF3%7D

Don't overreact

Commentary: Markets learned lessons from the 9/11 terrorist attacks, too

By Mark Hulbert, MarketWatch

Last Update: 12:01 ET Sep 11, 2007

ANNANDALE, Va. (MarketWatch) --- Today marks the sixth anniversary of the attacks on the World Trade Center and Pentagon.

I'll leave to others the drawing of the political, moral and social lessons of those attacks and the actions this country took in their wake.

But I do want to take the occasion of this anniversary to see what investors learned about the financial markets from how they reacted to those attacks.

First, the bare details. Consider an investor who was unlucky to have invested in the stock market at the close on Sept. 10, 2001, the day before the attacks. Even though the market remained closed for several days after those attacks, and dropped more than 5% on the day it eventually reopened, it quickly recovered. How long would it have taken for this unlucky investor to be in the black?

Believe it or not, just two months. By November 2001, the stock market was trading at a higher level than where it closed on Sept. 10, the day before the attacks.

And today, of course, six years later, the stock market is markedly higher than where it stood on Sept. 10. In fact, it is nearly 60% higher, as judged by the dividend-adjusted version of the Dow Jones Wilshire 5000 Index (97199001: 14,809.35, +195.82, +1.3%) . On an annualized basis, that works out to 8.1% per year.

Can we draw any lessons from this happy investment ending to this tragedy?

I think we can. The stock market's strength in the months following the 9/11 attacks is far closer to the historical rule than the exception following geopolitical crises.

Consider a study conducted by Ned Davis Research of Atlanta. The firm identified what it considered to be the 28 worst political or economic crises over the six decades prior to the 9/11 attacks. In 19 of these 28 cases, according to the firm, the Dow Jones Industrial Average ($INDU:13,308.39, +180.54, +1.4%) was higher six months after the crisis began. The average six-month Dow gain following all 28 crises was 2.3%.

From the perspective at least of this historical evidence, therefore, the Dow's quick recovery from its post 9/11 attack swoon should not have come as a surprise.

My writing this is not just 20-20 hindsight, either. It was immediately after the 9/11 attacks that Ned Davis Research calculated the Dow's average gain following those 28 crises. The obvious lesson was that investors tend to initially overreact to the downside, thereby upping the probabilities that the stock market would be higher in six months' time.

It is important to review these historical precedents even if you believe that there will not be another attack on U.S. soil of similar magnitude to 9/11. You still would have to grant that, at some point or other in the future, this or that geopolitical crisis will erupt and send the financial markets into a tailspin.

The lessons of history will be enormously helpful at such a time to provide a reality check on our emotional urge to dump all risky assets and go to cash.

Of course, impressive investment returns will never be able to overcome our emotional losses following those 9/11 attacks. But doing something rash in our portfolios would have helped no one, least of all those whose lives were lost.

Mark Hulbert is the founder of Hulbert Financial Digest in Annandale, Va. He has been tracking the advice of more than 160 financial newsletters since 1980.