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Remembering the Market Impacts of 9/11

This weekend was a difficult and poignant time of remembering a day that changed the world. The horrific events that unfolded on that day 10 years ago hit me in the gut all over again. I hope the memorial ceremonies in New York and around the country helped further the healing process for families and friends directly affected by these tragedies.
We all know now, 10 years later, that New York has come back stronger than ever; but what happened to the stock market during the ensuing days after 9/11? It is instructive to look at how the market behaved after this tragedy.
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For the financial professionals of the day, the initial shock quickly transformed to confusion and worry. This event came off the heels of the burst in the Tech bubble, which had already caused the S&P 500 to drop 29% from its peak in March of 2000.
The market had formed a bottom in April 2001, so there was hope that the tech sector had corrected and the worst of the tech wreck was over. Before the attack, investor sentiment had not fully shifted away from the jubilant days of the ever climbing stock market of the late 1990’s. After the attack, no one knew what to expect.
A tragedy of this magnitude had never happened in the financial center of the world. How long would the New York Stock Exchange (NYSE) trading floor be closed? Would the financial center of gravity drift away from New York City and relocate in another part of the global? What would happen to the stock market when it finally reopened?  
The attacks of 9/11 happened early on a Tuesday, and virtually all commercial activity in lower Manhattan shut down. After heroic cleanup and logistical efforts, the NYSE opened the following Monday, September 17th. The S&P 500 dropped about 5% that Monday, then and kept falling the whole week for a devastating loss of 11.6%. It was the eighth largest five-day percentage drop the market had seen in 50 years!
Investors eventually realized that it wasn’t the end of the world, so the overreaction quickly corrected itself and the market rebounded almost as quickly as it fell. A “V” shaped bottom was formed and the S&P 500 rose back to pre 9/11 levels in just one month. The overall downtrend that started in 2000, however, was not broken and the stock market continued to drop as the U.S. entered into a recession (shown by the light grey bar).  
Looking at the “V” nature of the drop after 9/11, it is doubtful that this event contributed significantly to the oncoming recession. As significant as damages were, according to Bloomberg Businessweek losses from 9/11 were about a third of what was inflicted by Hurricane Katrina, and only one-tenth of the recent tsunami in Japan.
After the stock market hit bottom at the end of the recession, the S&P 500 rose quickly and surpassed pre-9/11 levels in December 2003. A significant bull market continued for the next four years. To me this is yet another lesson of resiliency that can be achieved in the wake of tragedy.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.