LOOKING BACKWARD TO SEE WHERE WE MIGHT BE GOING

The stock market immediately declined in value upon reopening after September 11th's terrorist attacks. Since then, it has rebounded and settled into a trading range in which it has reached the level at which it was trading before September 11. Uncertainty both here at home and on the international scene has compounded problems as investors try to forecast the future and get a handle on where our domestic economy is going. Investors should be credited with having the perseverance to avoid panic and instead maintain a focus on the long-term horizon. There is the possibility of future events that will further test the market's resolve. We can't know how much uncertainty investors are willing to sustain before pulling their money out, but we can look to the past to see what happened in other contexts that had the potential to create fear and panic among investors.

The chart below shows the performance of the Dow Jones Industrial Average after certain events that had the potential to destabilize our economy. (Please note that reaction dates are subjective. Days refer to days on which the market was open for trading.)

Source: Ned Davis Research

The intent of displaying this information isn't to suggest that the stock market will follow any previously established pattern. Rather, it is to show its resilience in the face of enormous challenges in the past.

Having said that, the market should not be viewed as existing in a vacuum. Performance won't be predicated solely on the success of American military forays in Afghanistan or on results in eradicating terrorism. Even before September 11, the stock market was treading precariously from the effects of an economy that many have declared is in recession.

One thing working in the market's favor is an increased level of awareness of market movements among individual investors. People, who 10 or 15 years ago may have panicked in the wake of a calamity, are now more inclined to view the market through a long-term prism. They have accepted that volatility is an expected component of the market's ebbs and flows, and realize that, although past performance does not guarantee future results, the market has an average annual return of over 10 percent when viewed over the last 75 years.

Of course, averages being what they are, the annual returns of over 20 percent enjoyed in recent years may augur steep corrections. There is a school of thought that believes that stocks are still overvalued even after market corrections over the last 18 months. And that mindset may be correct. Yet, the current generation of investors has been weaned on double-digit returns and may have trouble accepting single-digit returns, positive though they may be. Due to their constant hunt for high returns, they may continue to pump more money into stocks, thereby inflating prices above where they would be in other scenarios. Furthermore, the elimination of long-term bonds, which featured high interest rates, could propel bond investors into stocks.

Many are the forces to which the stock market reacts. While September 11 will cast a long shadow over the market going forward, there are other factors at work as well.