Wednesday, September 11, 2013

Brief look back on the Market's Reaction to 9/11/01

To prevent a meltdown, the New York Stock Exchange (NYSE) and the Nasdaq did not open for trading on Tuesday morning, September 11, 2001. When the American Airlines planes struck the towers within 30 minutes of one another, it was obvious that America was under attack.

The assumption that a coordinated terrorist assault by Islamic radicals had targeted some of the country's most iconic structures and institutions was confirmed some time later that morning when a plane hit the Pentagon, and a fourth hijacked plane bound for Washington, D.C., was brought down by passengers in Shanksville, PA.

Market Reaction
Anticipating market chaos, panic selling and a disastrous loss of value in the wake of the attacks, the NYSE and the Nasdaq remained closed until September 17, the longest shutdown since 1933. Moreover, many trading, brokerage and other financial firms had offices in the World Trade Center and were unable to function in the wake of the tragic loss of life and collapse of both towers.

On the first day of NYSE trading after 9/11, the market fell 684 points, setting a record for the biggest loss in exchange history for one trading day. At the close of trading that Friday, ending a week that saw the biggest losses in NYSE history, the Dow Jones was down almost 1,370 points, representing a loss of over 14%. The Standard and Poor's (S&P) index lost 11.6%. An estimated $1.4 trillion in value was lost in those five days of trading.

Major stock sell-offs hit the airline and insurance sectors as anticipated when trading resumed. Hardest hit were American Airlines and United Airlines, carriers whose planes were hijacked for the terrorist attacks.

The AftermathSteep declines hit the travel, tourism, hospitality, entertainment and financial services sectors, as a wave of temporary fear and uncertainty swept through the nation. Among the financial services giants with the steepest drops in share prices were Merrill Lynch which lost 11.5%, and Morgan Stanley which lost 13%.

Insurance firms reportedly eventually paid out some $40.2 billion in 9/11 related claims. Among the biggest losers was Warren Buffet's Berkshire Hathaway. Most insurance firms subsequently dropped terrorist coverage.

Investing in Protection
Some sectors, however, prospered as a result of the attacks. Certain technology companies as well as defense and weaponry contractors saw prices for their shares increase substantially, anticipating a boost in government business as the country prepared for the long war on terror. Stock prices also spiked upward for communications and pharmaceutical firms

On the nation's options exchanges, including the Chicago Board Options Exchange (the world's largest), put and call volume increased correspondingly. Put options, which allow an investor to profit if a specific stock declines in price, were purchased in large numbers on airline, banking and insurance shares. Call options, which allow an investor to profit on stocks which go up in price, were purchased on defense and military related companies. In the short term, investors who had purchased these options made money.

The Bottom Line
The U.S. economy is legendary for its resilience, and in less than one month the Dow Jones, the Nasdaq and the S&P had regained its pre-9/11 price levels.


Portions reprinted courtesy of- http://www.investopedia.com/financial-edge/0911/how-september-11-affected-the-u.s.-stock-market.aspx