September 20, 2001

The stock market has declined approximately 10% since the terrorist attacks on U.S. soil. Looking at the industries performance during the first day of trading after the attack; we find that the best performers included industry groups such as Gold and Electronic (Defense). The worst performing groups include Airlines as well as Lodging and Hotels. Looking at these groups one can easily build a story as to how the terrorist attack altered the relative performance of the various industries. Yes; it is true that gold is the refuge of the cautious; that defense spending will increase and that people are not likely to fly as much in the immediate future. Thus one can attribute some of the relative performance to the incident; however that is not to say that one should ignore the fundamentals. In Table 1 we have reported the five best and worst performing industries during the first day of trading. We also show the earnings during the first and second quarters of the year. The results are quite interesting and somewhat surprising to those who attribute the relative performance to the incident. Looking at Table 1 it is apparent that the worst performers either had negative earnings – Entertainment and Gaming—or a major deterioration in earnings—Automobiles and Airlines. The one exception being Lodging; whose earnings remained unchanged. Thus looking at the earnings data one may argue that the airlines woes are largely attributable to the fundamentals and were anticipated. The sole exception to our theory is the lodging hotels and we could still argue that as evidence of the slow down became apparent traveling would diminish and so would the hotel’s profits.

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