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Wall Street Stays Calm, Ends Higher

By Brooke A. Masters and Paul Blustein
Washington Post Staff Writers
Friday, August 11, 2006

NEW YORK, Aug. 10 -- The initial, gut reaction by financial markets was predictable: When news flashes brought word of a suspected terrorist plot to bomb airplanes, stock prices plummeted. But although European markets ended down, U.S. investors overcame early morning jitters and the stock market finished up for the day for the first time in five trading sessions.

Analysts said that what might on first glance seem like a paradoxical reaction actually made sense. Many traders have factored terrorism risks into their thinking and are learning to see disrupted plots as good news, they said.

The long-term psychological and economic impact of yesterday's events remains unclear, to be sure. While markets have recovered fairly quickly from several terror attacks since Sept. 11, 2001, most of those occurred at times when the markets were already rising.

Economic growth in the United States has slowed sharply in the past few months. Even before the latest plot was reported, there was fear in some quarters that the country was headed for a recession. Some experts are worried that trouble in the airline sector and fresh news about terrorism could exacerbate what already appears to be economic weakness.

"We already have the problem of prices rising and employment growth slowing," said Stanley W. Black, a professor of economics at the University of North Carolina at Chapel Hill. "It would certainly not help to have an event that slows down transportation."

The alleged plot will have limited impact on the markets, predicted Larry Kantor, co-head of research at Barclays Capital, but it came at a particularly bad time in the economic cycle. "We've reached the limits of above-trend growth," he said. "The best is behind us."

European markets, which open first, reacted far more strongly to the news of the alleged plot than their U.S. counterparts. There, investors had less time to digest the news and have had more recent experience with terrorist attacks. Major stock market measures in Germany and France fell about 1 percent, while the British pound dropped sharply from a 15-month high against the dollar on fears that the news could dampen economic growth in Britain.

"There could clearly be some economic impact, with the transport and tourism sectors a particular concern, but it is far too early to know what the effect will be," Richard Lambert, director of the Confederation of British Industry, said in a statement posted on the organization's Web site.

U.S. investors were more sanguine. After an initial dip, all three major U.S. market indexes finished in positive territory Thursday. The Dow Jones industrial average rose 48.19, or 0.4 percent, to close at 11,124.37. The Standard & Poor's 500-stock index rose 5.86, or 0.6 percent, to 1,271.81. The Nasdaq composite index rose 11.46, or 0.6 percent, to 2,071.74.

"The markets are taking it as a buying opportunity," said Joseph Quinlan, chief market strategist for Bank of America's Global Wealth and Investment Management division.

The calm reaction was partly because the plot was so far unsuccessful and that the world has now survived a series of bombings in London, Madrid, Bali and Bombay, analysts said. "Investors understand that the threat is always there and it's very encouraging to see that the plot was foiled," said Alan Skrainka, chief market strategist for the brokerage firm Edward Jones.

By contrast, the market reacted sharply in September 2004 to an erroneous report that there had been a "mass casualty event" in the District. The Dow fell 70 points in the 20 minutes before police confirmed that the event was simply a case of teenagers mishandling pepper spray.

A study of the stock market's reaction to four previous terrorist attacks by Standard & Poor's chief investment strategist Sam Stovall found that although the markets slumped initially, the high-growth sectors had resumed their upward trend within four weeks of each attack. "The market is very resilient," he said.

Ken Tower, chief market strategist for Cybertrader Inc., a Charles Schwab & Co. subsidiary, agreed. "Terror plots only impact the market if they change people's behavior," he said.

Not surprisingly, the transportation sector, which would be most directly affected by heightened security, faced an early sell-off before recovering somewhat. Airline stocks had already been downgraded by a few analysts based on high oil prices and labor problems.

"Given today's attempted attacks against a backdrop of high oil prices heading into a seasonally weaker demand period, we think the risks have become too high to continue to recommend purchase," Standard & Poor's analyst Jim Corridore wrote about Continental Airlines. British Airways PLC, Deutsche Lufthansa AG and AMR Corp., the parent company of American Airlines, were all among the losers yesterday.

Tourism in Britain has become more "resilient" since the 2001 attacks, said Elliott Frisby, a spokesman for the British Tourist Authority, in a phone interview. He said that despite the London subway bombings in July 2005, a record number of foreign tourists came to the country last year -- about 30 million. So far this year, tourism is up about 6 percent over the comparable period last year, to 15 million visitors, he said.

"The recovery time, if you like, is getting shorter and shorter," he said. "People are now aware that these things can happen anywhere in the world, and they will not be put off by them."

Movers

British Airways fell $2.85, to $70.48.

Continental Airlines fell 35 cents, to $23.86.

UAL , parent of United Airlines, fell 31 cents, to $23.52.

AIG rose $1.83, to $60.32. The insurer posted a 29 percent drop in second-quarter profits that nonetheless beat Wall Street forecasts.

Viacom rose $3.27, to $37.05.

Target rose $2.44, to $47.72, on a 13 percent rise in quarterly profits.

Indexes

New York Stock Exchange composite index rose 17.15, to 8,209.78.

American Stock Exchange index fell 11.82, to 1,989.90.

Russell 2000 index of smaller-company stocks rose 5.22, to 686.27.

Volume

NYSE: 2.44 billion shares, down from 2.68 billion on Wednesday. Advancers outnumbered decliners by 9 to 7.

Nasdaq: 1.77 billion shares, down from 2.12 billion. Advancers outnumbered decliners.

Commodities

Crude oil for September delivery: $74, down 35 cents.

Gold for current delivery: $634.90 a troy ounce, down from $650.50 on Wednesday.

Blustein reported from Washington. Staff researcher Richard Drezen contributed to this report.

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