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Across My Desk: If you haven't had your fill 9/11 comments, I think you might find highlights of this special report interesting:



Earlier this month Merrill Lynch released this special report titled, September 11 -- Five Years Later: An Investment Perspective, by Bob Doll, President and Chief Investment Officer, Merrill Lynch Investment Managers. What follows are highlights from that report:

The reality of terrorism:

We have learned that while specific events can rattle the markets, financial assets also tend to recover fairly quickly. Since September 11, 2001 the world has experienced other high-profile terrorist acts. In the immediate aftermath of these disturbing events, investors often panic and dump stocks, causing short-term market downturns. However, within six months, history has shown that markets rally and more than make up for the negative market performance during the reaction periods.

Increased risk premiums:Since the end of the bear market in October 2002, corporate earnings have been extremely robust, while stock prices have provided decent, albeit unspectacular, returns. In our view, there is a higher level of "risk premium" built into stock prices, resulting in the relative lower level of stock prices compared to earnings.

While a number of factors have acted as drags on stock prices over the past few years, investor uncertainty about geopolitical risk in general and terrorism in particular has contributed, as investors have become more uneasy about the future. However, fundamentals ultimately are what drive the market in the long-term, and in our opinion, the lower P/E ratios of the past several years should help provide a solid tailwind for stock prices going forward.

The continued importance of diversification:

In turbulent market environments, such as those that tend to occur during periods of geopolitical instability or following acts of terrorism, diversification can be especiallyimportant. Immediately following terrorist events over the past 15 years, in most cases, stocks suffered a decline while bonds tended to experience a slight rally or at least tended to post positive returns. In the month following these events, the markets tended to settle down somewhat and in the 6- and 12-month periods following the events, stocks tended to outperform bonds.

For investors, the important lesson is that while returns of different asset classes almost always tend to perform differently over time, crisis events can cause even wider-than-usual differences in returns, illustrating the benefits of investing in multiple asset classes.

Living with uncertainty:

Investors tend to have little tolerance for uncertainty. Over the past five years, there have been a number of shocks and disruptions to global financial markets caused by both political and economic factors, and both markets and investors tend to react dramatically in response.

If this period has taught investors anything, it is that in the long run, markets have shown remarkable resiliency in times of crisis.


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