WSJ 3/23/04
IMMEDIATELY AFTER the Sept. 11, 2001, terrorist attacks, Americans afraid to fly took to the nation's highways, a decision that many experts on risks said could be a fatal error: Driving 1,000 miles poses a greater risk of deadly accidents than flying the same distance.
Statistics show the risk experts were right.
In the first analysis of U.S. Department of Transportation data for the last three months of 2001, a study finds there was a significant increase in the number of fatal crashes in this period compared with the same period in the year before the attacks. Because of the extra traffic, 353 more people died in traffic accidents, calculates Gerd Gigerenzer of the Max Planck Institute for Human Development in Berlin, an expert on how people respond to low-probability but high-consequence events called "dread risks." He will report his analysis in the April issue of the journal Psychological Science, published by the American Psychological Society.
It was clear in autumn of 2001 that Americans were avoiding airplanes, prompting the airlines to reduce their air schedules. That reduction may have sent even more people out on the highways. Domestic air-passenger miles fell that October, November and December by 20%, 17% and 12%, respectively, from the year earlier, according to the Air Transport Association, the trade organization of U.S. airlines. There is no way to know for sure how many people avoided travel altogether, and how many took to the road instead. But there is indirect evidence.
Vehicle miles driven in the last quarter of 2001 were, on average, 2.9% greater than in those months a year before, reports the Transportation Department. That compares with a year-to-year rise of only 0.9% in the months of January to September 2001. Even more telling, in October, November and December of 2001 the greatest traffic increase -- a rise of 5.3% compared to a year earlier -- came on rural interstates, which pick up much of the long-distance travel that would otherwise occur in the air.
Those extra vehicle miles took a toll. In the months before September 2001, the number of fatal car crashes was little different from the numbers for the previous five years. But in the last quarter of 2001, the total of fatal accidents rose 8%, with half of that increase attributable to post-9/11 fear of flying. "This number of lost lives is an estimate of the price Americans paid for trying to avoid the risk of flying," Prof. Gigerenzer says.
The Sept. 11 attacks aren't the only incidents prompting travelers to take to the roads, says risk-communication expert Peter Sandman of Princeton, N.J. After two big railway accidents in Britain in 2000 and 2002 killed a total of 11 people, "the public responded by switching from trains to cars," he says, resulting in more auto deaths than in the railway fatalities. "The train crash killed more people by scaring them into their cars than it did directly."
So, does this mean people are letting their fear cloud their judgment? "Certainly, people are not maximizing their life expectancy when they switch from trains to cars after a railway crash, or from planes to cars after 9/11," Mr. Sandman says. But even for those who know they are statistically safer in a plane than on the highway, boarding an airplane after 9/11 "might have meant a less-relaxing holiday or a more stressful business trip; it might have meant a tougher time sleeping or tolerating the kids," he says.
WHEN INVESTORS FOCUS more on world instability than on business fundamentals, stocks tend to fall. That is what happened yesterday, as the Dow Jones Industrial Average gave up almost 122 points amid worries about terrorism, Asian stability and the price of oil.
The economic news many investors are waiting for -- the March employment report -- isn't due until next week. Most first-quarter earnings reports don't arrive until later next month. As they wait, investors have faced unsettling news reports, including Israel's assassination of a Palestinian leader, tensions between China and Taiwan, and continuing nervousness about the terrorist bombing in Spain.
"It is fear" that is weighing on stocks, said Todd Leone, head of listed trading at New York brokerage firm SG Cowen. "It's all the geopolitical stuff."
Late in the day, the Dow fell almost to 10000 before recovering. When the index was down 174.44 points, at 10012.16, bargain hunters stepped in and began buying, and the blue chips bounced.
The Dow finished down 121.85, or 1.20%, at 10064.75. It is down 3.7% on the year, at the lowest level since Dec. 15. As recently as Feb. 11, the industrials were at a 2 1/2-year high of 10737.70, but have fallen 6.3% since then. The index hasn't finished below 10000 since Dec. 10.
Investors' focus on unstable world situations could be seen across financial markets. Gold rose $4.90 to a two-month high of $417.40 an ounce. Gold's jump could have been affected by Asian buying following Taiwan's close election. The losing candidate challenged the outcome amid controversy over an apparent attempt on the life of Taiwan's president, who was declared the winner. U.S. Treasury bonds, another refuge in times of worry, also jumped.
"People are worried about another terrorist attack," said Edgar Peters, chief investment strategist at Boston money-management firm PanAgora Asset Management. "What we are getting now is a lot of short-term political uncertainty. That is dominating things because we don't have a lot of fundamental earnings and economic news."
With interest rates exceptionally low, Mr. Peters said, the stock decline should be limited. Low rates promote economic growth by helping reduce expenses for companies and individuals alike.
Aside from the political concerns, however, some investors aren't persuaded that first-quarter earnings will live up to expectations. Most of the earnings reports aren't due until mid-April, and when investors are nervous, it is common for them to bid stocks down in late March as they wring their hands over the coming earnings news. Because stocks are up heavily over the past 18 months and because investors have been counting on strong corporate results, a level of angst is typical at this time.
Those concerns have been fueled by sharp oil-price increases, fueled partly by the Middle East's unsettled politics and partly by OPEC's plan to cut production. Crude oil futures fell by about $1 on the New York Mercantile Exchange, amid talk that OPEC might delay output cuts.
"Many culprits are blamed for bringing the major stock averages back to where they were in mid-December, but dominant among them is the price of oil," wrote Bob Doll, president of Merrill Lynch Investment Managers, a money-management arm of Merrill Lynch, in a weekly report to clients.
In the stock market, all the major indexes finished at their lowest since December. The Nasdaq Composite Index, whose many tech stocks led the market gains last year, fell 1.58%, or 30.57 points, to 1909.90, down 4.7% on the year. The broad S&P 500 fell 1.30%, or 14.38 points, to 1095.40, down 1.5% this year.
DEMOCRACY CAN BE a big headache for emerging-markets investors.
In Taipei, the stock market plunged 6.7% yesterday after the legitimacy of President Chen Shui-bian's narrow victory in Saturday's elections was challenged by his opponent, Lien Chan.
Mr. Lien has charged voting irregularities and is demanding that the courts declare the results invalid, a request Taiwan's high court is considering. Some of President Chen's critics have gone so far as to assert that Friday's assassination attempt on the president and his running mate was staged to win voter support.
Most Taiwan shares fell close to their daily-limit of 7% yesterday amid relatively light volume; traders said they couldn't match enough buy orders to the flood of sell requests.
Stocks fell sharply at the open today, falling more than 5%, but by midmorning the benchmark Weighted Price Index was off 3%. The Taiwan government has said it will consider drawing on its $15 billion stock-market stabilization fund -- which it has used to prop up share prices temporarily during previous crises -- but said it would not waste its funds if the selling pressure was too powerful.
The stock drop has spilled over to Hong Kong, as the Hang Seng Index slid 1.9% yesterday to close at its lowest level of the year, though Taiwan's electoral dispute isn't expected to have a widespread effect on the region's stock markets. The index also began yesterday lower, but by midmorning was up 0.4%.
While the uncertainty of a close presidential contest can put pressure on any country's stock market, election day can be especially unnerving in emerging markets like Taiwan, where the democratic process is still relatively new and fragile. This weekend's election was even more of a surprise because Mr. Lien's Kuomintang party -- which was considered more agreeable to working with China than the incumbents -- appeared poised for victory until a few days before the election.
For the moment, many U.S. investors say they are steering clear of Taiwan until the dust settles on the market and the political situation becomes clearer. But some note that history suggests political turmoil in emerging markets isn't necessarily a bad thing in the longer run, citing recent turnarounds in Russia and Brazil.
"When there's a political crisis, there is usually a buying opportunity," says Mark Madden, who manages the Pioneer Emerging Markets Fund. "Political change creates uncertainty, and that strikes fear in investors. But typically, it doesn't change the long-term fundamentals of the economy," he said.
Some argue that this is the case for Taiwan, where stock prices are considered relatively cheap and the semiconductor cycle is turning more favorable for the island's many chip foundries. In fact, going into the election, Taipei's Weighted Price Index was up 16% for the year, making it one of the best-performing markets globally.
Many companies that are known to be friendly with the Kuomintang party had enjoyed run-ups this year in anticipation of an opposition victory. Food producer Uni-President Enterprises Corp. had surged 58% this year through Friday, while China Television Co. had powered ahead 139% during that period. Both stocks fell close to the 7% limit yesterday and are expected to tumble much further if the current election results hold.
"Lesson No. 1 here is: Don't bet on elections," says Edmund Harriss, an emerging-markets portfolio manager at Guinness Atkinson Asset Management. Nevertheless, he adds, some Taiwan stocks that shouldn't be affected much by local politics were unloaded during bouts of selling and are starting to look attractive.
Mr. Harriss points to tech companies that sell products globally, like computer maker and distributor Acer Inc. Its shares fell nearly 7% to 48.90 New Taiwan dollars (US$1.47) yesterday, despite news that its board has approved a plan to buy back as many as 50 million of its shares. Mr. Harriss said he would be inclined to add shares if the election uncertainty knocks them down much further.
Eswar Menon, an emerging-markets-fund manager for Loomis Sayles takes a like-minded view. "Either candidate winning doesn't change the economic backdrop very much," he says.
Taiwan is not alone in Asia when it comes to suffering political upheaval. Earlier this month, South Korea's national assembly impeached President Roh Moo Hyun on charges of alleged illegal election campaigning. While Prime Minister Goh Kun serves as acting president, the fate of Mr. Roh is in the hands of Korea's Constitutional Court, which must decide whether to validate the impeachment.
Yet despite a 2.2% fall yesterday, Seoul's Kospi Index had been bouncing back following the impeachment. Investors say that is because they expect Korea's economic rebound to continue and that the government would maintain policies to attract foreign investment and improve corporate governance.
Recent political crises in other emerging markets have temporarily rocked share prices, only to reward investors who moved in while others rushed for the exits. Moscow's RTS Index fell by 26% in one month last fall following the government's arrest of Mikhail Khodorkovsky, head of oil giant OAO Yukos.
But after President Vladimir Putin reassured foreign investors this was an isolated case, the market rallied. The RTS is now up 48% from its Nov. 19 lows, and about 10% higher from the time of the arrest.
Even more dramatic was Brazil's election of left-wing presidential candidate Luiz Inacio Lula da Silva in 2002. Brazil's stock market crumbled and government bond yields skyrocketed to 25 percentage points above comparable U.S. Treasurys as foreign investors sold out of Brazil in fear that Mr. da Silva would allow a debt default and pursue antibusiness policies.
Not only did those fears fail to materialize, but Brazil approved a landmark public-pension revision package and revised its bankruptcy laws. Foreign investors rushed back into this beaten-down market and sent the Bovespa Index up 141% in dollar terms last year.