A Wild Ride Is Expected for Stocks

Investment professionals expect a sharp but potentially short sell-off today as the U.S. stock market reopens after its longest closure in 68 years.

Working against the market will be a general concern that Tuesday’s terrorist attacks will shove the already weak U.S. economy into recession. Stocks especially exposed to the tragedy’s aftermath--such as airlines and insurance companies--could be particularly hard hit.

Early today in Asia, major stock markets tumbled, adding to last week’s losses and darkening the mood for Wall Street’s opening. Japan’s Nikkei-225 share index was off 421.78 points, or 4.2%, to 9,587.11 at midday. The Hong Kong market was down 3.4%, and the South Korean market was off 2.6%.

On the upside, the shares of U.S. companies that could benefit from the recovery effort and the expected U.S. military buildup, such as construction and defense issues, stand to lead any rally, market watchers say. Meanwhile, a possible interest rate cut by the Federal Reserve as early as this morning could be a big help.

In other words, market pros say, they’re bracing for anything today.

“In the short term, I expect tremendous volatility,” said Peter Trapp, manager of the Needham Growth Fund in New York. “People who feel that they have to get out are going to get out.”

But Art Bonnel, manager of the Bonnel Growth Fund, said he looks for a steep drop at the U.S. market’s open followed by a strong bounce-back later in the morning.

“That’s the usual trading pattern after a crisis,” he said. “By the end of the day, it could look like a typical day.”

Bonnel said an early plunge could knock 5% to 10% off the major indexes. The Dow industrials closed a week ago at 9,605.51, so a 10% drop would slice off 960 points.

Under the New York Stock Exchange’s regular trading curbs aimed at preventing massive sell-offs, the Dow would have to fall at least 1,100 points by 2:30 p.m. EDT for trading to be halted.

Yet even if today’s stock trading gets as wild as expected, some portfolio managers expect a sense of normality to gradually return to the market by midweek.

“Things will be business as usual [by Wednesday], as much as that’s possible,” Bonnel said. “At least I hope so, because otherwise the terrorists win.”

Some observers say the Fed could give the market an immediate boost, or stem a sell-off, by cutting interest rates again.

“I wouldn’t be surprised to see them make a move [this] morning,” Trapp said.

The possibility of major redemptions by mutual fund investors worries some observers, however. If jittery investors bail out, fund managers might have to sell stocks to meet redemptions, adding downward pressure to the market.

On the heels of the market’s four-day shutdown--the longest since March 1933--some investment pros fear that sell orders could have piled up. But most fund companies say they have heard from few investors since Tuesday’s tragedy.

T. Rowe Price Group spokesman Steve Norwitz said Sunday that the Baltimore-based fund company has gotten relatively few calls from investors since the attacks, and he said more purchase than redemption orders have come in. But the firm will double its phone staff working today in case of a surge in activity, he said.

On their Web sites and phone lines, fund firms have been advising shareholders to stay calm and reminding them that buy, sell or exchange orders for fund shares placed today will be executed at the market’s closing prices.

Still, Trapp said, “we as a mutual fund industry will be forced to get a handle on whether there are outflows. That may determine whether we can put on our buying sneakers.”

Some managers already appear poised to pounce on stocks.

Marty Whitman, who runs the Third Avenue Value Fund, said in a letter to shareholders that despite the possibility of a “draconian bear market,” he stands ready to scoop up selected bargains in the event of a sell-off this week. He reminded investors that such a strategy has worked well in past setbacks, such as October 1987.

Billionaire investor Warren Buffett told CBS News on Sunday that he won’t sell any of his stocks today, and, in fact, if the markets plunge he might use it as a buying opportunity. “If prices would fall significantly, there’s some things I might buy,” he said.

Companies might also rush to their own defense. In an effort to ensure smooth trading, the Securities and Exchange Commission relaxed rules Friday governing share buybacks by companies. More than 20 firms have announced new or increased stock buyback plans in recent days.

But the real issue for the U.S. market is the condition of the national and global economies, said David Bowers, chief global strategist at Merrill Lynch. U.S. markets had fallen steeply during the last 18 months amid a weakening global economy, and it will take months to get a handle on the impact of the terrorist strikes and possible reprisals, he said.

Blue-chip companies’ fourth-quarter earnings might drop as much as 15% from a year earlier, according to earnings tracker Thomson Financial/First Call. Before Tuesday, analysts were forecasting a 2.7% drop.

Clearly, the airline industry has been devastated by the attacks, and U.S. airline stocks could fall more than 50% when trading resumes today, according to Credit Suisse First Boston. Reduced ticket sales and the prospect of costly new security measures already have induced many carriers to announce sharp schedule cutbacks.

Insurers could be sold off today as well, portfolio managers say. Firms seen as having exposure to the disaster include Chubb Corp.; General Re, owned by Buffett’s holding company Berkshire Hathaway Inc.; and American International Group Inc., the world’s largest insurer.

Industries that rely on the American consumer, including leisure, retail, hotels and gaming, also could get clobbered in anticipation of a hunkering-down mentality, some fear.

But with Congress already appropriating $40 billion to disaster relief and a military buildup, the construction and defense industries are expected to get a big lift. Major defense contractors include Raytheon Co., General Dynamics Corp., Lockheed Martin Corp. and Northrop Grumman Corp.

Trapp said the tragedy also might spur companies to accelerate their technology and telecom spending again, which could aid those already battered sectors.

Some say energy stocks could benefit from a spike in oil prices if escalating Mideast hostility destabilizes supply.

But Bowers cautioned that the conventional wisdom regarding industries--as well as the overall market--could prove wrong.

“The instant analysis of ‘buy this, sell that’ is too easy,” he said. “At times like this, the thing to do is stay calm and see how things actually develop. If you’re diversified and defensively positioned, the best thing to do is probably nothing.”