Market first war casualty - Drumbeat blamed for stocks' decline

www.arizonarepublic.com David Karp/Associated Press Wire services Jan. 28, 2003

Thomas Scavone grimaces as prices declined Monday at the New York Stock Exchange for the seventh time in eight sessions.

It may be a month or two before the first shots are fired in Iraq, but for all intents and purposes a war has already begun on financial markets.

On Wall Street, stock-price declines over the past two weeks have wiped out the gains built up earlier in the month on expectations of an economic rebound later in the year. On Monday, the Dow Jones industrial average dropped below the 8,000 mark, the blue chip index's first close under that bench mark since the middle of October.

A steady stream of downbeat corporate earnings reports and forecasts has added to the sell-off, but most analysts blame jitters about war for the market's downbeat mood.

War jitters have spread overseas as well, with the dollar dropping to new lows against the euro. The greenback is down about 8 percent to the European currency over the past two months. Shaken by what they see as President Bush's willingness to have the United States bear the full political and economic cost of a war to oust Saddam Hussein, some European investors have concluded that the dollar and dollar-denominated stocks and bonds may not be the havens in a time of geopolitical crisis that they are usually thought to be.

The dollar's fall mirrors the steady increase in the price of crude oil. The shut down of supply from strike-ridden Venezuela and fears that an Iraq war could disrupt shipments from Iraq and other Middle Eastern countries have combined to drive up the price of crude to more than $32 per barrel. Higher energy prices are another reason some forecasters think economic growth will be sluggish in the coming months and hurt consumer and business confidence, which will translate to less spending for goods, services and factory expansion.

Some investors fear that even a quick end to the Iraq crisis won't put the market's broader worries to rest. Concerns are building among investors that history's normal pattern, in which war typically is good for stocks, might not apply this time.

The worry is that even if the United States defeats Iraq quickly, or somehow prevails without war, U.S. investors will continue to face a host of world problems that could weigh on stocks for some time to come. In addition to continuing economic and corporate troubles here, investors worry about North Korea's nuclear threat, which some consider an even bigger problem than Iraq. Others think that continuing instability in the Middle East could keep oil prices high.

Also, America's war against terrorism won't be over after an Iraq war, meaning that the risk of further attacks will continue to hang over the stock market.

"Even if you beat Saddam, do you beat terrorism?" asks Henry Herrmann, chief investment officer at mutual fund group Waddell & Reed in Overland Park, Kan. "Terrorism is a weight on the market."

Plenty of investors are still hoping stocks return to the historical pattern, in which they weaken just before a war, then rebound strongly soon after the gunfire begins. That is what happened during World War II, the Korean War and the Gulf War.

It seemed to be happening in fall 2001, when stocks fell after the Sept. 11 attacks, but then rose strongly once the U.S. began its war on Afghanistan's Taliban.

But the war in Afghanistan didn't produce the same result. Instead of sparking a continuing bull market, that fighting led to more investor disappointment. All the stock gains from that war have unraveled, not just because of Iraq, but also because of Enron Corp.'s meltdown, anemic corporate earnings and Wall Street scandals.

Contributing to the declines is a worry that victory in Afghanistan and a potential victory in Iraq don't represent an end to the conflict. Terrorism not only remains a concern but could grow as a result of the fallout from any U.S. move against Iraq.

Not all wars are good for stocks, says Tim Hayes, global stock strategist at market research firm Ned Davis Research in Venice, Fla., who has made a study of past international crises' effects on stock markets.

"If (an Iraq invasion) just muddies things up in the Middle East and things look worse, maybe Vietnam is a better comparison" than World War II, he says.

Compiled from reports by the Washington Post and the Wall Street Journal.