World Crises and the Stock Market: Coping With Uncertainty

Disbelief, fear, grief, anger — these feelings were common after the horrific events that shook our nation on September 11, 2001. Just as humans experienced waves of emotions, the stock market experienced waves of volatility. However, it’s important to remember that America has surmounted crises before. Examining how some past global problems have affected the U.S. stock market may help you better grapple with the economic and investment uncertainties of crisis events.

Action and Reaction
It may reassure you to know that the stock market has historically rewarded those who stayed the course during tumultuous times, although past performance cannot guarantee future results. For instance, the first trading day after the Cuban Missile Crisis (October 23, 1962), the S&P 500 fell 3.78%. Yet only six months later, it had surged 24.66%. More recently, over the one-month period after Iraq invaded Kuwait — a move that eventually led to the first Gulf War — the S&P 500 declined 9.12%. One year later, the index had jumped 10.16%.*

Sometimes the market’s rebound has been slower in coming. For instance, after the bombing of Pearl Harbor, the S&P 500 experienced an initial drop, rose slightly after one month and then found itself lower six months after the attack. But by VJ Day, less than four years later in August 1945, the S&P 500 had rebounded 57%.*

Moving Forward
Of course, economic developments take time to play out and markets often remain highly volatile in the immediate wake of a world crises. Aside from keeping history in mind, how might you cope in our ever changing world? Consider these suggestions:

• Focus on your long-term financial plan rather than short-term market dips.
• Be realistic, but not fatalistic, about current market conditions and returns. Investors prepared for occasional declines will be less likely to fall prey to panic selling.
• Keep your portfolio well diversified to help cushion volatility.
• Get to know your finances better and review how different accounts — such as IRAs and employer-sponsored retirement plans — are invested.
• Review your portfolio and make sure that your risk tolerance meshes with your financial goals and time horizon.
• Speak with a qualified financial advisor before making changes to your portfolio. He or she can help temper emotional investment decisions.

Remember that while our nation has faced crises before, the economy and the stock market have recovered, in time, stronger than before.

* Past performance is no guarantee of future results.

©2004 Standard & Poor’s Financial Communications. All rights reserved.