The ever-turbulent stock market has produced a new crop of jittery investors. The week after the attack, the Dow Jones industrial average fell 14.26%, the worst weekly percentage loss in 61 years. The following week, it rebounded 7.43%, which gave investors a bit of encouragement. But before the nation even thought of going to war, the market was prone to wild fluctuations. Individual and institutional investors are showing a growing fear of uncertainty: They drained roughly $20 billion from stock funds from July through September, more money than has been pulled out during any other quarter on record.
But money managers caution investors not to bail out of the market during these calamitous times. Since World War II, the market has consistently rebounded after political and military crises (see chart, “Are you Ready for a Market Rebound?”). A lot of investors, however, are ignoring this fact and continue to pull money out of equities in search of greener and safer pastures.
Depressed investor confidence and a topsy-turvy market have impacted firms like Ariel Capital Management (No. 3 on the BE ASSET MANAGERS list with $5.2 billion in assets under management). “We were down 10% [the week following the attack] when the market was down 14%. We lost about $700 million–almost a year’s work,” says Mellody Hobson, the firm’s president. “We’re telling investors not to panic. We’re hearing a lot of war language and nobody knows what it means.”
Hobson is especially concerned that African Americans–especially first-time investors–will pull out of the stock market at one of its most opportune times. According to the 2001 Ariel Mutual Funds/ Charles Schwab & Co. Black Investor Survey, which compares the investment attitudes and behaviors of black and white households earning $50,000 or more, African Americans display much more anxiety about market volatility than their white counterparts. In fact, the survey revealed 32% of African Americans have had their long-term confidence shaken by market turbulence, compared with 15% of whites. (See chart, “How African Americans View Market Volatility.”)
In fact, nervous investors who decided to take their losses and sell shares of stocks and mutual funds right after the terrorist attacks may have severely shredded their portfolios. One month after the attack–on October 11–the market bounced back, recovering the $1.38 trillion lost because of huge dips after the terrorist attacks. And two of the three major indexes, the Standard & Poor’s 500 and the Nasdaq Composite Index, rose above their precrisis closes of September 10.
Does all of this activity mean investors are out of the woods? Not by a long shot.
The market was extremely volatile before the attacks–and that was after significant pruning of interest rates by the Federal Reserve. Even though Greenspan and Company recently brought interest rate down to 2.5% from 6.5%–the lowest rate in nearly 40 years–expect the financial markets to continue their erratic behavior. They have been driven by the uncertainty in current events–ranging from the U.S. bombing of Afghanistan in an effort to cripple the Al Qaeda network to the anthrax scare.