Experts Ponder the Next Move for Stocks

Fears that the U.S. stock market’s opening bell--whenever it occurs--could trigger an aftershock of Tuesday’s disaster were somewhat allayed Wednesday.

Traders and analysts, who were initially concerned that share prices would plunge when trading resumed after Tuesday’s terrorist attacks, were heartened Wednesday by modest rebounds in European stock markets.

The recovery in Europe “indicates that a climactic capitulation in stock prices is not likely,” said Eugene Peroni, market analyst for investment firm Nuveen & Co. in Philadelphia. “While we may not return to normalcy immediately, there won’t be sustained selling.”

Most major European markets posted gains Wednesday after diving Tuesday. British stocks rose 2.9% while the German market added 1.4%.

Analysts also were confident that the Federal Reserve will continue to take steps to ensure that the markets remain liquid--that is, that there is no dearth of cash or credit essential to keeping trillions of dollars in transactions flowing.

Fed officials already have said the central bank stands ready to inject as much liquidity into the system as is needed. Indeed, the central bank Wednesday was reported to have pumped $38.3 billion in temporary reserves into the U.S. banking system. That gives banks more capital to lend.

Many economists also expect the Fed to reduce its key short-term interest rate by as much as a half a percentage point between now and Oct. 2, the next scheduled meeting of the central bank’s policymaking committee. The Fed has cut rates seven times this year, to 3.5% now for its benchmark rate as the economy has weakened.

Another fast cut would help shore up share prices, many analysts argue.

Still, experts said that investors will continue to be wary because of the new uncertainties injected into the political and economic landscapes. Even if stocks bounce higher on the first trading day, that may not set the trend, some said.

“Here’s what we don’t know: the nature of the U.S. [military] response, and what will it lead to,” said Robert W. Bissell, president of Los Angeles-based Wells Capital Management. “The markets hate uncertainty. We’re encouraging our clients not to react in the first couple of days.”

Another key issue is the effect the bombings might have on the economy overall. The primary fear is that the attacks will undermine consumer confidence in the United States, already a faltering pillar of domestic growth, or simply distract consumers from spending.

“Not unlike the Gulf War in 1990-91 and last year’s five-week [presidential] election, people may spend more time watching CNN and less time shopping,” said Edward Kerschner, investment strategist at brokerage UBS Warburg. That, he said, could lead to weaker U.S. economic growth and weaker corporate profits.

Corporate profits have dived this year amid the economy’s slide, a major reason stock prices have continued to sink.

On the other side, several economists said that by exacerbating fears of a tottering economy, the terrorist attacks will remove any opposition to federal deficit spending and other stimulative policies favored by the Bush administration.

Some analysts say an expected surge in defense spending, for example, will bolster shares of such companies as Lockheed Martin, Raytheon and Northrop Grumman when trading resumes.

Nonetheless, “This is going to have a negative effect on the economy, no doubt about it,” said Jeremy J. Siegel, professor of finance at the Wharton School of Business in Philadelphia. He cited the depressive effect of the bombings on travel and tourism as major factors in a steeper slowdown.

Many analysts worry that U.S. airline and insurance stocks could be hard hit, as European shares in those sectors were hit Tuesday.

“I don’t think the average American knows how much business is done by people going from one place to another,” Siegel said. “That’s going to be hit a lot. The government’s going to need to spend [on defense], but that’s going to take place over a period of months or even years. Once people see the slowdown affecting their own jobs, there could be a tremendous drop in consumer confidence.”

Siegel expects the market to fall as much as 5%, at least at the opening of trading.

Another imponderable in judging the market’s next move is the emotional mind-set of thousands of traders and brokers in New York who will be able to do their jobs only by returning to the scene of their worst nightmare.

“I think it’s going to be very difficult for people to go down there, just from an emotional standpoint,” said Kenneth J. McCarthy, an economist whose firm is located more than 40 blocks north of the disaster site. “To go back to work, at the same time wondering whether there are bodies being pulled out of the rubble while they’re trying to trade, what will really be on their minds? Will it be trading, or other issues?”

That’s an important issue, because on the New York Stock Exchange every trade must be handled at least nominally in person by an intermediary known as a “specialist” on the trading floor. Veteran specialists, whose professional culture demands a steely resistance to political and economic shocks, expressed confidence Wednesday that their staffs would be up to the challenge.

“The older ones have seen this before,” said J. Barry Bocklet, principal at Bocklet & Co., referring to such catastrophic events as the 1993 World Trade Center bombing and the 1987 stock market crash. “The younger ones will get their baptism of fire.”