Clearly, the first quarter was dominated by the geopolitical strife, the preparations for war, and its commencement. It's important to note, however, that the war-related worries of the financial markets should be kept in perspective, especially in light of the fact that there are men and women serving our country who have already made the ultimate sacrifice. Our thoughts are with them and their families, and we hope for the safe return of our troops after a successful mission.
Despite the drama of recent weeks, it appears that Americans are girded for a tough fight, and have shown more resolve to continue in their daily lives than the markets overall. During the first days of trading following the commencement of hostilities, the markets continued a robust rally as the sense of uncertainty dissipated. Then, with the first news of intransigence among enemy troops, the market plummeted into a day-long tailspin before essentially freezing up for the next few days with low trading volume. The American consumer, on the other hand, appeared more prepared to cope with the short-term push-and-pull of war news, much more so than many predicted. For example, in the first four days following the opening salvos of the war, new car sales dropped by only 8%: During the first month of the 1991 Gulf War, the rate dropped by 38%, and it dropped by 25% in the days following September 11, 2001. While such a measure can't serve as a predictor for the future direction of our whole economy, the modest decline in comparison to previous events does suggest that the economic fundamentals that are in place may continue to sustain the recovery, provided that the trend goes beyond car sales, and will continue longer term.
The caveats to this possibility include factors that could put further pressure on the hesitating consumer, such as lingering high energy prices that cramp summer travel and dampen discretionary spending. Also, while low rates may keep home sales rates buoyant, the refinancing boom is now long in the tooth and there are questions as to how much more spending will come as a result of new refinancing. At this point, however, the resiliency of the consumer remains a positive factor, but less so than earlier in the market cycle.
Even though there are signs of recovery, we expect the market to demonstrate much volatility as it reacts to daily geopolitical events, but we believe it is still poised for a meaningful improvement once it looks past the war news. High productivity, low interest rates, a competitive dollar, and additional fiscal stimulus from the tax cuts of 2001 and 2002 can help pave the way for economic growth. Combining those factors with low inventories and much-improved access to capital, business spending could become significant, as spending can only be put off for so long before competition requires it. Still, uncertainties over the duration of the war are causing most pent-up spending needs to remain pent up for a while longer.
Finally, as we noted recently, corporations are paying close attention to their balance sheets, and have built in a fair amount of operating leverage. This means that with even a modest upturn in activity, many businesses are poised to achieve significant economies of scale, moving the bulk of new revenues to the bottom line. For now, however, such indications take a back seat to the war news, as the markets, like the rest of us, watch each news bulletin for news of a breakthrough. Since that breakthrough could come at any time, we believe it is critical to position our portfolios to increase the likelihood that our clients participate as fully as possible in a rebound