The Starting Line: Market watchers look to history

Most analysts are expecting the markets to initially swoon as the Dow Jones industrial average and the Nasdaq open either Friday or Monday. On Tuesday, terrorists attacked the World Trade Center in New York City, causing the collapse of the financial district. Analogies to Pearl Harbor and other disasters weren't hard to come by.

"Besides the human tragedy of epic proportions, it is also an economic disaster. The twin towers were at the heart of U.S. money management," USB Piper Jaffray semiconductor analyst Ashok Kumar said in a research note this week. "While systems and records can be replaced, the personnel cannot. Market liquidity is expected to be significantly impacted in the weeks ahead."

Gary Tapp, an analyst at SunTrust Robinson Humphrey, said an economic recovery could be pushed out one to three months because of the World Trade Center disaster as consumers pull back on spending. However, Tapp added that the Federal Reserve's effort to pump money into the economy, increased government spending, and a boost in capital spending to rebuild infrastructure, technology and defense could offset waning consumer confidence.

No matter what happens to the economy or markets over the short term, analysts are telling investors to stay put.

"We don't pretend to know how investors and the markets will respond in the short term," Vanguard Chairman John J. Brennan said in a note to mutual fund shareholders. "But in the long term--which is where most investors should focus--the financial markets are driven not by emotion or reactions but rather by fundamental economic conditions."

According to Kumar and Ralph Bloch, strategist at Raymond James & Associates, here's how the stock market has reacted to previous crises:

1906: Earthquake in San Francisco caused a break of about 12 percent in the Dow over a period of about three weeks.

1914: World War I started, pitting Germany and Austria-Hungary (the Central Powers) against Britain, France and Russia. On July 31, the New York Stock Exchange closed for the first time since 1873 and did not resume trading until Dec. 15. It reopened about 3 points higher.

1917: From the day the United States entered World War I in April to year's end, the market declined by about 35 percent.

1939: When Britain and France announced they would defend Poland in March, the Dow dropped about 20 percent over a month.

1940: The blitzkrieg in the spring caused a 25 percent drop over a period of two weeks.

1941: Pearl Harbor. The Dow was at approximately 117 in December 1941. It fell to 93 by early May 1942--a 20 percent drop. It then rallied to 145 by July 1943, Bloch said.

1950: After the Korean War began in June, the market dropped 13 percent in a month.

1956: The Israelis, British and French invaded Egypt after it seized the Suez Canal. The Dow lost 10 percent during the four-month period.

1962: In August, when the markets endured the Cuban missile crisis, the Dow was at 615. It fell to 550 in October and rose to 650 in December and 767 by December 1963. Kumar said the impact to the markets was minimal.

1963: On Nov. 22, President John F. Kennedy was assassinated and the markets fell 20 points in 20 minutes before being shut down. When the markets reopened under Lyndon B. Johnson, the Dow went from 712 in November to 825 by April 1964 and 891 by November 1964. "I remember having to be professional and do my job after the murder of JFK. It seems unfeeling, but it has to be done," Bloch said.

1974: The United States was in the midst of a bear market when OPEC instituted an oil embargo. Over the next nine months the Standard & Poor's 500 dropped a further 40 percent.

"History suggests that selling into 'panics' usually proves foolish," Bloch said.