To print article, click Print on your browser's File menu. Go back Posted 9/13/2001

Extra! Terror isn't predictable, but recovery is All the computer modeling in the world couldn't have foreseen this week's events. It can, however, offer a good idea of where we go from here. By Victor Niederhoffer and Laurel Kenner The deaths and injuries of innocent people in the attacks on the World Trade Center and Pentagon and the suffering of their families saddens and discourages us as we write Tuesday evening. It would be tempting to bury our heads in the sand amid the devastation and shock. After all, we gave a bullish call in last week’s column, based on an analysis of what typically occurs after the market falls the previous two months. The tragedy, and the subsequent closing of U.S. exchanges and declines in other markets around the world, comes at a particularly difficult time, as many investors already were feeling a measure of panic. As many readers have pointed out, Tuesday’s events highlight a weakness in the statistical approach: A quantitative method cannot predict every variation. What it can do, however, is give you a small edge in the predicted direction. Vic, who has seen many panics in his 40 years as a trader, wrote his Ph.D. thesis on major world events and their aftermaths in the marketplace. The best thing we can do now is to point out there have been many crises that seemed absolutely devastating at the time, and to quantify what happened next. The following table shows declines on the day of world crises and the move over the next four days. Crisis and recovery Crisis Start of crisis Initial decline Next 4 days Start of Korean War June 26, 1950 -4.6% -2.2% Suez Canal crisis Oct. 31, 1956 -1.4% 2.4% Khrushchev in U.S. Sept. 14, 1959 -1.9% 2.0% Arms blockade in Cuba Oct. 23, 1962 -1.9% 3.8% Kennedy assassination Nov. 22, 1963 -2.9% 5.7% A separate study, also in Vic’s thesis, of market reactions to presidential deaths and serious illnesses from 1919 to the 1960s showed similar results. Seventeen events were considered, ranging from President Wilson’s nervous breakdown to President Kennedy’s assassination. To be included, the market had to decline by at least 1% on the day the event was reported. The average decline on the day of the event was 3%. By four days later, the market had come back 2.5%, making up 80% of the loss on the day of the event. This week, we performed another study, looking at what has happened over the past seven years when S&P 500 futures fell more than 20 points at the open. The market on average rallied a substantial 3% over the next four days, with a rise on 80% of the days. Results as reliable as this would occur by chance alone on 1 out of 20 occasions. These three studies and others are consistent with a general phenomenon we’ve found, which is that an important crisis tends to create a substantial downward reaction at the open that on average is completely reversed on the positive side within the next week. As of this writing, there is no telling when U.S. markets will reopen. On Wednesday morning in Asia, Japan’s Nikkei 225 and Hong Kong’s Hang Seng indexes both promptly fell below 10,000, joining the Dow Jones Industrial Average in a historic convergence few thought would ever come about. The Nikkei dropped as low as 9,604, one point lower than the Dow’s last quote before the attack. Without losing the forest for the trees, we point out that a pattern was seen in the initial hour or two of trading in the first four markets to open on Wednesday morning while our markets were closed. New Zealand opened down 5% and recovered a percentage point. Japan opened down 6.7% and recovered 2 percentage points. Australia opened 4.6% and recovered to down 3.6%. Hong Kong fell as much as 10% and bounced back to down 7%. This is in line with the general tendency shown by quantitative research. Comfort in the Bard We apologize for providing a statistical analysis in the midst of all the carnage, but that is all we can do. That, and turn to the greats for guidance. Along that line, we were fortunate enough to receive some timeless aphorisms on panics from Duncan Coker, who divides his time between studying the Bard trading and enjoying outdoor life in his home of Colorado. ”O that a man might know the end of this day’s business ere it come! But I sufficeth that the day will end, and then the end is known. Come, ho!” Brutus before battle, in “Julius Caesar” Bard to investors: Outcomes are far from certain, yet we summon courage and enter anyway. ”-- I can call spirits from the vasty deep. -- Why, so can I, or so any man; but will they come when you do call for them? “King Henry IV,” Part I Bard to investors: Market calls may go unanswered. ”There is a tide in the affairs of men which, taken at the flood, leads on to fortune; omitted, all the voyage of their life is bound in shallows and in miseries. On such a sea we now float, and must take the current when it serves, or lose our venture. Brutus, in “Julius Caesar” Bard to investors:Don’t give way to terror. We concur with Shakespeare. We extend our deepest sympathy to all those touched by Tuesday’s disasters and hope that all will withstand the coming moves. MSN Money's editorial goal is to provide a forum for personal finance and investment ideas. 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