Posted on 02/04/2003 1:00:32 PM PST by Dog Gone
Macabre as it sounds, stock market rallies have been a consequence of war in the past. And an attack on Iraq would remove some of the uncertainty that has clouded the market.
"As soon as the bullets start to fly we get resolution," says Ken Tower of CyberTrader Inc. "That's positive for consumers and the economy, so we expect the market takes off in a continuation of the rally we saw from October to December."
Tower's forecast comes with a caveat, though. Like others, he warns investors not to bet the whole farm on the outcome of a potential Desert Storm II.
"Wars are like snow flakes; no two have the same shape," says Tower, who in his job as chief strategist at the Charles Schwab unit has studied stocks' reaction to periods of war.
There seems to be historical evidence that suggests war has been typically bullish for stocks.
The Dow Jones industrial average (CBOT:^DJI - News) has posted a significant rise in the period that follows major events in U.S. history that precipitated war, according to Gibbons Burke at MarketHistory.com.
The blue-chip Dow on average was up 31.4 percent 18 months after key incidents leading to U.S. involvement in the Spanish-American War, World Wars One and Two, the Korean War, the Vietnam War and the 1991 Desert Storm offensive that ended Iraq's occupation of Kuwait, Burke said.
"When we actually start pulling the trigger has been bullish in the past," Burke told Reuters.
Still, many say this time a rally could fizzle because investors likely will fret about corporate earnings and the sluggish U.S. economy.
Others argue a key difference between now and the period after the Gulf War is that Wall Street was experiencing a bull market then, which continued uninterrupted for a decade. Now, however, more than $8 trillion in investor wealth has been wiped out since stocks peaked in early 2000.
"You can get a near-term bounce, a feel-good rally," said Gary Kaltbaum, who heads advisory firm Investors Edge Partners. He questions the validity of comparisons of the present to 1990 and says we are in a long-term bear market.
"You work off the excesses of the prior bull, and the bigger the froth of the bull, the bigger the bear," he said.
SELL THE RUMOR, BUY THE NEWS
The stock market often experiences a dip in the months immediately preceding a war when rumors and speculation about potential military action put investors on guard.
This time is no exception, with major market gauges off their highs of early January's rally. So stocks could be poised for a rebound if fighting begins, Wall Street experts say.
"The old adage that has held true on Wall Street for years is that you buy the market when the first shots are fired and sell the market when the boys come home," said Kevin Lane, chief market strategist at Technimentals Research Group.
The market tumbled when Iraqi President Saddam Hussein invaded Kuwait in August 1990, Burke said.
Stocks continued to decline through October until the United States began to mobilize troops late in 1990.
"When the shooting began in January (1991), the market celebrated with an amazing rally, and it never looked back," Burke said in a report.
The key to a lasting recovery in the market, analysts say, is a swift resolution of hostilities.
But the market could quickly stumble if Wall Street doesn't sense very soon after the start of military action that a quick resolution is in the cards.
"I would give it three weeks," said Charles Payne, analyst at Wall Street Strategies.
Louis Navellier, who manages $5 billion for Navellier & Associates, said ousting Saddam would be positive for stocks, whether it's by force or by exile.
"Oil prices will fall (especially if the Venezuelan strike ends simultaneously) and businesses will step up to the plate and start increasing orders," Navellier said in a report.
But Richard Bernstein, chief U.S. strategist at Merrill Lynch & Co., said investors seem overly confident about the potential war and oil prices.
An Iraqi war may not be as short as everyone assumes, and forecasts of companies' sales and earnings may be optimistic given that U.S. economic growth is below 4 percent, he said.
Bernstein said he is increasingly concerned higher energy prices might tip the economy into recession again.
Alan Ackerman, market strategist at Fahnestock & Co., also warned against being overly bullish.
"The successful outcome of any war is not a certainty. And the attack on Iraq may bring more instability to the Middle East than any of us have predicted," he said.
Who hte heck is this guy? Dr. Suess?
Richard W.
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