Investment patterns probably won't mirror 1991 Gulf War

newsobserver.com Saturday, February 15, 2003 6:11PM EST By MIKE MEYERS, MINNEAPOLIS-ST. PAUL STAR TRIBUNE

(SH) - Same desert. Same armies. Same threat of battles to come. Don't count on history repeating itself, however. Especially when it comes to investing money against a backdrop of war.

In the months before Operation Desert Storm in January 1991, U.S. stock prices sank. But once victory seemed assured, the markets turned around. It was the start of the longest bull market in history - and the most enduring period of economic prosperity on record.

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Minneapolis-St. Paul Star-Tribune But just as generals sometimes make the mistake of fighting the last war, investment advisers today warn against thinking the market will behave the same way in a 2003 confrontation with Iraq as it did in 1991.

"Normally the market goes down, then rallies during war, and a year later it's higher," said Phil Dow, market strategist at RBC Dain Rauscher, who has studied stock market trends in war and peace dating back to 1926.

"This time I don't know," Dow said, cautioning against expecting a repeat of the past, in which market euphoria followed wars. A return to normality in the stock market cannot be considered a fait accompli if there is a protracted war in the Middle East.

The paradox behind his worry: "Uncertainty has bred the certainty that only bad things can happen," Dow said.

Others agree.

"If it looks like we're going to win quickly with few casualties, maybe history will repeat itself," and good times will roll again, said Matt Norris, portfolio manager at Advantus Capital Management.

However, if the United States gets sucked into a military quagmire, the stock market could sag even more than it already has. The 1970s were dreary years for investors as inflation rates soared and the nation pursued a "guns and butter" plan that essentially deferred paying the financial costs of the Vietnam War.

"The historical parallel may be Vietnam, (only) much more costly in terms of lives and money and no clear resolution," Norris said.

Patrick Hagan, senior financial adviser at American Express Financial Advisors, said the run-up to a possible war in 2003 has been longer than the suspense before the 1991 conflict. Hesitation has a price for investors, he said.

"We all dislike indecision," Hagan said. "When we're left up in the air, we always think of the worst possible outcome."

Even if all goes well in the Persian Gulf, Hagan doubts stock prices will recover from three years of back-to-back losses any time soon.

"I don't think we'll all of a sudden be back where we were in 1999," he said.

Said Bruce Bittles, at the Milwaukee-based brokerage firm Robert W. Baird & Co., "What we're telling our people is that though this looks much like 1990-1991, that the market rarely reacts the same way under the same circumstances."

The lesson of the Persian Gulf War was that once the shooting starts, the stock market can soar as investors shake off fears.

That may happen again. But what are the risks that it won't?

Stock market watchers cite many differences between then and now:

• A cornered Saddam may be more likely to inflict large casualties with chemical or biological weapons, and a protracted war with many casualties heightens uncertainties and makes the markets quake.

• Fears of domestic terrorism in the wake of a Mideast conflict were nonexistent in the early 1990s. Today, such fears are rampant and have a chilling effect on investor confidence.

• The U.S. probably would garrison Iraq for years to come after an armistice, raising the cost of the military conflict long after the battlefield is quiet. The peacekeeping phase of war is risky, and that could continue to rock investor confidence.

"It sounds like we're making some kind of commitment to provide freedom for Iraq," Dow said. The reaction in peacetime Iraq may be gratitude - or hostility from cliques competing for power: "A receptive crowd or a minefield of ethnicity," he said.

Many investment advisers are telling clients to stick to investments in well-run consumer products companies such as Procter & Gamble, General Mills or Coca-Cola on the theory that people still will eat, drink and use Kleenex in times of war or peace.

But investors willing to take more risk, market watchers say, are betting on the stocks of oil companies, which will benefit if oil prices spike in a drawn-out war, or hotel and other travel-related firms, which could rise if the war ends quickly.

"Our clients are just suffering," said Dow, at RBC Dain Rauscher. "They're between a state of denial and absolutely considering staying out of the market forever."