Ed Yardeni, chief investment strategist at Deutsche Banc Alexander Brown, foresees trouble ahead for markets as the effects of the World Trade Center attack play out.

After previous major upheavals, markets have dropped and quickly rebounded. But this event may also herald a protracted and destructive war between terrorists and the Western world, he says. As a result, he argues that throughout the rest of the year, the economy and corporate profits will remain depressed.

He notes that this past week’s economic indicators all suggest that the economy had slipped into a recession just prior to the attack.

As a result, Yardeni is lowering his S&P 500 operating earnings to $40 per share from $45 per share for 2001. Although he says the outlook for 2002 is clearer. “We can expect a huge increase in government spending on both defense and offense. Reducing our dependence on foreign sources of energy is also likely to be a major focus of energy policy. Companies may move away from just-in-time to just-in-case inventory management systems. The Fed is providing ample liquidity and is likely to cut the federal funds rate 50 basis points, possibly as soon as Monday.”

The bottom line, Yardeni says, is that the stock market may continue to trade in a volatile, but flat trend as it has been since early 1999. “Investors who see the world as I do are likely to buy stocks in the following industries: defense, defense electronics, domestic oil and gas drilling, electric utilities, pharmaceuticals, medical devices, electronic component distributors, trucking services, truck manufacturing, REITS
specializing in warehouse space, logistics and inventory software and wireless systems. Of course, a panic sell-off of retail, airline, insurance, and leisure companies can be expected and would be a buying opportunity, in my opinion.”