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When the Shock Begins to Fade

By Sam Stovall Terrorist attacks on London sent global markets into turmoil and caused investors the world over to wonder what to do. While it would be irresponsible for us or anyone to encourage profiting from another's misfortune, it would also be inappropriate for financial professionals not to remind investors that while negative news events have historically triggered short-term sell-offs, the resiliency of America's fundamental and governmental strength have prevailed.

I've just reviewed data from five unanticipated market-shock days -- September 11, Iraq's invasion of Kuwait on Aug. 20, 1990, the Kennedy assassination on Nov. 22, 1963, the Cuban missile crisis on Oct. 20, 1962, and the attack on Pearl Harbor on Dec. 7, 1941.

SHORT-TERM RETREAT. Also, I have looked at the S&P 500 price performances after the first day of trading following each of those events, the number of days it took the S&P 500 to bottom, its total decline in price, and finally, the days it took until the S&P 500 closed above the level prior to the shock event.

Shocks take a toll on investors' nerves, as seen in the average 3.2% one-day decline in price following the five events. Yet the number of days the market was in free-fall was encouragingly short -- only five days (excluding Pearl Harbor, the average was four days). The total price decline before the market sought a near-term plateau was 6%.

The most surprising statistic, in our opinion, was that the S&P 500 was trading at a new high only an average of 62 days later (and an incredible 14 days without Pearl Harbor).

STAYING THE COURSE. S&P's Investment Policy Committee echoes the deep sorrow associated with the loss of life from this event, but reminds investors to let their investment decisions be driven by economic factors. S&P believes the U.S. economy is on firm footing and expects real gross domestic product (GDP) to advance 3.5% this year and 3.0% in 2006. In fact, we see economic advances for all of the major economies this year and don't expect this recent event to materially alter this outlook.

S&P's IPC projects the S&P 500 to close 2005 at 1255 as a result of this strong economic growth and an expected 11% increase in earnings for companies in the S&P 500. We remain single-digit bulls, and recommend that investors focus on high quality equities. Stovall is chief investment strategist for Standard & Poor's

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