US ATTACK: US markets knocked down again

From a slight morning surge to an afternoon slide, U.S. markets experienced choppy trading Tuesday, closing down as recession fears managed once again to rattle investors. The losses weren't as severe as those posted Monday, however, when most major indices took a tumble in their first day of trading since the devastating terrorist attacks launched against the U.S. a week ago today.

The Nasdaq closed down 1.54 percent and the S&P 500 ended down .57 percent, while the Dow Jones Industrial Average finished the day .19 percent lower, as investor uncertainty outweighed the effect of bargain hunters, some of whom took advantage of yesterday's losses to get a hold of some cheaper shares.

The Nasdaq, Dow Jones Industrial Average and S&P 500 all closed down Monday as nervous investors bet on a delayed recovery [See "UPDATE3 - RECOVERY - Markets tumble; Dow posts record loss," Sept. 17]. In more ominous news, the Dow posted a record one-day loss yesterday, plummeting 684.81 points by market close. Although the U.S. Federal Reserve slashed interest rates for an eighth time so far this year Monday morning, even that half-point cut didn't buoy market confidence.

During the day's heavy trading, the share values of major IT companies such as Microsoft Corp., Intel Corp., and Compaq Computer Corp. took a hit.

But by the end of the day Tuesday, some tech stocks that had taken a beating Monday were once again knocked down, but others managed a slight recovery.

Compaq Computer Corp. (CPQ) closed down 2.40 percent to US$8.54 Tuesday after falling 15.45 percent Monday, and Intel Corp. (INTC) slipped down .38 percent to $23.50 after closing down more than 9 percent Monday. Yahoo Inc. (YHOO) lost 7.72 percent to $10.04 by market close, after losing another 7.32 percent Monday.

However, IBM Corp. (IBM) closed up 2.69 percent to $95.85 Tuesday, while AOL Time Warner Inc. (AOL) traded up 1.63 percent to $30.49. Microsoft Corp. (MSFT) rose 2.65 percent to $54.31 after dropping more than 8 percent Monday, and Oracle Corp. (ORCL) crept up 2.91 percent to $11.33 Tuesday.

There was good news to be found in how well the markets functioned technically, given that many brokerages, and some exchanges, located in lower Manhattan were damaged as a consequence of the attacks.

"You couldn't ask for the exchanges to run better," said Damon Kovelsky, an analyst with Meridien Research Inc., a group that provides research on financial industry technology. "Nasdaq had over 2 billion trades yesterday, and no reported problems."

The markets' stellar technical performed was due to the fact that the brokerages and exchanges all have backup systems and locations, mandated by the Federal Communications Commission (FCC), Kovelsky said.

The markets functioned successfully because "they had an efficient disaster recovery setup," he added.

Still, "Monday was probably very nervewracking," Kovelsky said, considering the unforeseeable extent of damage the U.S. financial system incurred last week.

While shaken investors took their fears to the trading floors, some economists advised that there was no reason to panic given that disasters do not generally cause recessions.

University of California at Los Angeles (UCLA) economic forecasters Edward E. Leamer and Christopher Thornberg said in a report released last week that although the terrorist attacks on the World Trade Center and the Pentagon have taken a tremendous human toll, they will have "little impact" on the national economy, which was already suffering from the dot-com downturn.

The UCLA forecasters compared the attacks to natural disasters and their effects on the economy, saying that natural disasters do not have any long-lasting economic repercussions.

Furthermore, concerns that consumer insecurity will lead people to stop spending, driving the nation into a recession, are overblown, the forecasters wrote. This assumption "grossly overestimates the psychological fragility of American consumers," they added.

Still, some real financial concerns are already being reported.

So far, airlines are bearing the immediate brunt of the economic fallout following the attacks, as last week's air travel ban took a costly bite out of company revenue. One day after the attacks, Midway Airlines Corp. announced that it was shutting its doors permanently. By Saturday, Continental Airlines Inc. said that it was laying off some 12,000 employees and permanently reducing its flight schedule by 20 percent. After markets closed yesterday, US Airways Group Inc. announced it would lay off 11,000 employees, while America West Holdings Corp. decided to slash 2,000 jobs and America Trans Air Inc. said it will layoff 1,500 employees.

The airline industry is lobbying for a $20 billion federal bailout, saying that it has lost $1 billion already.

But even though some industry's have been directly affected, it remains to be seen how the attacks will impact the overall economy in the medium term.

Hoping to grease the wheels of the financial markets, the Federal Reserve said Tuesday that it added $36.25 billion to the banking system in temporary reserves. This move will give banks extra funds in the short term, and is intended to level out day-to-day fluctuations in the federal funds rate by injecting extra cash into the financial system. The Fed holds fixed-income securities as collateral for the temporary reserves, which will have to be repaid or rolled over on Wednesday.