The Market After September 11

Contents

1. Four days without a market
2. The recession that had already begun
3. What moved out of lower Manhattan

The market uncertainty after September 11 was one of the two episodes during which Brent O’Mara entered the industry, the other being the technology bubble, and it is the one described here. Two things are often confused about it. The first is the closing of the American stock markets, which lasted four trading days and happened because the physical and communications infrastructure of lower Manhattan had been wrecked. The second is the recession of 2001, which memory tends to date from the attacks but which the economists who date such things placed six months earlier. The two are related, and the second was deepened by the first, but they had different causes, and keeping them apart is the beginning of understanding what that autumn did to markets.

Four days without a market

On the morning of the attacks, The New York Times reported the next day, financial markets plunged in two hemispheres before trading was halted; the American exchanges never opened and were to remain closed the following day, the first time news had kept the New York exchange shut for two full days since the Great Depression.¹ Traders sold anything that seemed risky, prices fell in Europe and Latin America before those markets closed, and the dollar, which kept trading, fell against the euro, the pound and the yen.¹ Through the days that followed, Federal Reserve History records, the Federal Reserve Bank of New York made sure that banking activity continued and that the basic dollar payment systems never closed, while its officers, medical staff and building offered treatment, showers and meals to rescue workers from the site a few blocks away.⁷

The reopening was set for Monday, September 17, less than a week after the attacks. The Times’s preview that morning explained why the markets could not simply have stayed shut: many Americans had most or all of their savings in stocks, some of them newly laid off and needing to sell shares to pay a mortgage, and companies needed to sell bonds and stocks to raise money, since the bond market would eventually halt if stocks could not be traded.² It also explained the difference between the two markets. The electronic market had no physical center, its computers were not in New York City and its data lines did not run through downtown, so it could have opened sooner; the floor based exchange depended on lower Manhattan’s communications and could not move to a backup site, and the electronic market agreed not to reopen until the floor was ready.²

Figure

From the reopening to the low of 2002

1. 01
   September 11 to 16The exchanges stayed shut for almost a week, the longest closure since the Great Depression
2. 02
   September 17Trading resumed after two minutes of silence, with a half point rate cut an hour before the bell
3. 03
   The first weekThe broad market fell nearly 5 percent on the first day and nearly 12 percent by the end of the week
4. 04
   October 7The invasion of Afghanistan began; within a month the market was back to its level before the attacks
5. 05
   June and July 2002The broad market fell more than 20 percent over the two months
6. 06
   October 2002The decline reached its low

A CNBC retrospective written on the twentieth anniversary by a reporter who stood outside the exchange that morning describes the Treasury Secretary arriving to ring the opening bell with firefighters and police officers, two minutes of silence on the floor, and a half point rate cut by the Federal Reserve an hour before the open.³ The trading itself was anticlimactic. The broad market fell nearly 5 percent that day, to its lowest level in nearly three years, and had fallen nearly 12 percent from its level before the attacks by the end of the week; the closure had been the longest since the Great Depression, and what mattered to the people on the floor was only that the market was open again.³ Within a month the broad market had returned to where it stood before the attacks, helped by stimulus and lower rates, before the losses of 2002 took it lower still.³

Figure

What a recession looks like on average

of business economists surveyed a week after the attacks said the economy was already in recession

82 percent

the average fall in real output across the previous eight recessions

1.5 percent

the average length of the fall in output after a business cycle peak

7 months

The recession that had already begun

A week after the attacks, a survey of business economists asked whether the United States economy was in a recession, and the Federal Reserve Bank of San Francisco reported in October that 82 percent had answered yes.⁵ The bank’s economic letter used the moment to explain what the word means. A recession, strictly, is a period when overall activity is declining rather than merely weak; it starts just after a peak and ends at a trough, and the dating committee of the National Bureau of Economic Research looks for depth, duration and dispersion across the economy before it declares one.⁵ The letter observed that industrial production had peaked in September 2000 and fallen 5 percent since, that employment had been falling since March 2001, and that the divergent timing of the indicators made the episode unusually hard to call; the author thought a recession was not a certainty, though if one came its start would likely be dated to the spring.⁵ The method is described under how recessions are dated.

The committee answered on November 26. Its announcement placed the peak of business activity in March 2001, which meant the expansion that began in March 1991 had lasted exactly ten years, the longest in the bureau’s chronology, and that a recession had begun in the spring.⁶ Industrial production had fallen close to 6 percent over twelve months, employment had declined about 0.7 percent from its March peak, and the October employment figures, the first to reflect the attacks, had tipped the committee’s judgment.⁶ The committee addressed the confusion directly in its own questions and answers: dating the peak to March did not mean the attacks played no role, since before them the decline might have been too mild to qualify, and the attacks clearly deepened the contraction and may have been an important factor in turning the episode into a recession.⁶ The contraction that was already under way had its roots in the technology bubble, whose collapse the CNBC piece names, together with the attacks, as what pushed the country into recession.³

Figure

The recession in the committee's numbers

the month the committee chose as the peak of the expansion

March 2001

the length of the expansion that ended, the longest in the chronology

10 years

the cumulative fall in employment through October 2001

0.7 percent

What moved out of lower Manhattan

The longer consequence was geographic. For centuries, NPR observed on the twentieth anniversary, Wall Street had been home to the largest banks in the world, and the attacks led many executives to question the wisdom of keeping an entire industry in one place; banks and financial firms moved to other neighborhoods, to Connecticut and to New Jersey, and the electronic market moved its staff to Times Square, now its global headquarters.⁴ One investment firm that had lost more than sixty colleagues on the 104th floor of the south tower moved to Midtown, while a card company that had been in lower Manhattan since the 1850s chose to return to its building across from the new trade center.⁴ City officials and developers reimagined the district for residents, and the result was a neighborhood with more than twice as many apartments and condominiums as before the attacks, where finance, insurance and real estate had supplied almost half the jobs and by 2020 supplied roughly a third, the rest filled by technology, media and advertising companies.⁴

The CNBC reporter adds the view from the floor. The financial district became a partly closed armed camp for a year, the smoke from the site could be seen for miles, and everyone who worked there had lost friends, including 658 employees of one bond brokerage in the north tower.³ The attacks and the collapse of the technology bubble together reduced interest in trading, and more of it was moving onto screens, eroding the floor’s dominance.³ The same month that the exchanges reopened, the Federal Reserve Bank of New York kept running the open market operations and the payment plumbing that the Fed system depends on, functions it has held since it opened in 1914.⁷

What the week of the reopening recorded, beyond the figures, was behavior. There had been numerous calls in the days before from investors insisting it was a patriotic duty to buy, a prominent investor had said on television that he would not sell when the market reopened, and the exchange’s chairman told the floor not to bet against the country; the market fell anyway, and then recovered, and then fell further the next summer.³ How people act when markets fall, and how far that behavior differs from what they say in advance, is the subject of investor behavior in downturns, and the episode of 1987 that set the modern pattern is covered under Black Monday.