Stocksview: Wall St. Feels the Creeps in Crawl to War
www.morningstar.ca 25 Jan 03(8:14 PM) | E-mail Article to a Friend
By Pierre Belec
NEW YORK (Reuters) - The question du jour in the crawl toward war against Iraq: How will stocks behave after the United States leads another war on the oil-rich country?
Investors are crossing their fingers, hoping that if there is a war, it will a short one. But few people are willing to bet the ranch on how things will turn out because the economy is fragile and the stock market is not in great shape.
A long-lasting war could wreak havoc on both.
The price of energy will be the biggest factor. If oil prices spike up at this stage of the current economic down cycle, growth in the United States and the rest of the world could grind to a virtual halt.
Wartime history won't be of much help in anticipating the market's response to fighting in the Gulf.
The run-up to war has traditionally caused stocks to drop and stay weak until the United States takes military action.
That is how things played out ahead of both World War Two and the last Gulf War, 12 years ago. Back then, stocks fell to levels that were judged to be undervalued and the market had an easy time rallying.
This time around, things are different. The U.S. economy is not back on its feet after sliding into recession in 2001 and it is more vulnerable to a destabilizing shock. Just as important, the global economy is wobbly .
Stock investors are eager to put more money on the table but the experts warn that the threat of another terrorist attack on the United States will be the wild card. The horrors of Sept. 11 kicked up the risk.
PEP TALK
The nation's brokerage houses are doing a lot of hand holding. They're laying out possible outcomes. Most are putting a positive spin on the war story, trying to soothe investors' worries.
Stock salesman are reminding their clients that the market didn't crash after the Gulf War began on Jan. 17, 1991.
One brokerage house offers "Ammunition when clients say they are afraid to buy anything because we may be going to war soon" in a pep talk to its sales force.
"For those who were in the business back during the Gulf War, I'm sure you remember the market was dismal between the time Iraq invaded Kuwait and when we started shooting," the internal memo says, adding that stocks performed superbly during Desert Storm.
Indeed, the market was fired up. The Dow Jones industrial average initially surged 115 points or 4.6 percent. Three months later, the Dow was up some 500 points or 19.7 percent. One year later, the blue-chip index had climbed an impressive 756 points, or 30.1 percent.
Crude oil soared in the months leading up to the Gulf War. In today's prices, adjusted for inflation, oil climbed from $23 a barrel to $47 by October of 1990. Days after the first bomb was dropped on Baghdad, oil slid to $25.
Fast forward to 2003. Oil hovers at a 26-month high around $32 a barrel, up from $20 in 2002, fueled in part by unrest in Venezuela, a big supplier to the United States. Whether oil prices will continue to increase in the event of a war is the big unknown for the world economy and for stocks.
After a strong start in the first week of 2003, the stock market is now dead in the water, with the Dow having lost all of the year's gains, and then some.
The Dow Jones industrial average fell 238.46 points on Friday, or 2.85 percent, to 8,131.01. The Standard & Poor's 500 index slumped 25.94 points, or 2.92 percent, to 861.40. Both indexes hit their lowest since Oct. 17. The Nasdaq Composite Index dropped 46.14 points, or 3.32 percent, to 1,342.13.
For the week, the Dow tumbled 5.3 percent, the S&P 500 4.5 percent and the Nasdaq 2.5 percent. The Dow and S&P 500 are in negative ground for the year despite an early January rally.
SMARTING INVESTORS
Clearly investors are scared stiff. Few are making bets that the next military strike against Iraq will be a cakewalk or that oil prices will collapse. Only the brave are getting flashbacks to the glory days of the Gulf War.
Average investors have gotten smart after $8 trillion in market wealth went up in smoke over the past three years. They've learned that Wall Street is a risky place.
The smart money says: Wait until the geopolitical script plays itself out and then make decisions with all the facts in hand.
"Any kind of surprise terrorist event or war, could send the market into a free-fall crash," writes James Dines, editor of the Dines Letter. "What I find especially disturbing is the very urgency of President Bush's demand that Iraq be attacked immediately before Saddam Hussein 'develops weapons of mass destruction.' Why the hurry?. I can only wonder whether Bush knows something that he has not chosen to disclose."
Bush again this week beat the war drums, saying that Hussein is not disarming but is "delaying and deceiving." But opposition to the U.S. stand has mounted, with China and Russia joining France, Germany and Canada on Thursday in urging that U.N. weapons inspectors be given more time in Iraq.
Iraq said it would expand its cooperation with United Nations weapons inspectors but said it was convinced the United States will attack despite efforts aimed at resolution. A Russian military source said this week the Washington and its allies planned an attack in the second half of February.
Yet some people reckon history is on the side of investors.
"The market loves action," says Kent Engelke, capital markets strategist for Anderson & Strudwick Inc., "I arrogantly and naively believe the market will follow a similar course as in 1991 once we start bombing Iraq. It will again be a no-contest."
Dines says the market is too risky and only the most aggressive traders should venture into stocks at this time. The average investor should sit on the sidelines.
"Nobody knows for sure where the markets are going next in these dangerous times," Dines says.