'Relief rally' slowing but not stalling - With war course set, market performance turns on the basics

By Allison Linn, Rocky Mountain News March 19, 2003

The biggest, baddest threat on Wall Street this year doesn't sound that scary: uncertainty.

Uncertainty - mainly over whether the country would go to war with Iraq - has been key to dragging the major market indexes down the past couple of months.

That all came to an abrupt halt a few days ago when the Bush administration signaled that war with Iraq was inevitable. The massive market rally that followed finally slowed Tuesday, with major indicators rising just slightly.

Financial advisers said the rally would likely have happened no matter what decision President Bush made - as long as he made a decision.

"I think the market just wanted it one way or the other. I think it would've gone up whether we went to war or not," said Joseph Mossa, managing director of investments with Piper Jaffray in Denver.

Now the big question is: What happens next?

"Right now what we are seeing is what I call a 'sense of relief rally,' " said Sung Won Sohn, chief economist with Wells Fargo in Minneapolis. "(But) once the war actually starts we will get a better fix on how short or messy this war is going to be, and depending on how the war unfolds we could see a significant change in the direction of the market."

In the near term, financial advisers expect investors to react strongly to daily war news, negative or positive.

"So much is going to depend on how things proceed, so for the next several weeks (market fluctuations) are going to be event-driven," said Judi Wagner, of Denver's Wagner Investment Management.

Some said the markets could be affected by the ongoing terrorist threat; others said the markets would only have a major reaction if there were an actual attack on U.S. interests.

No matter what, Sohn doesn't expect as strong a market rally as in the Gulf War in 1991.

For one thing, he said, it will be more difficult to oust Saddam Hussein from Baghdad than it was to liberate Kuwait.

Another factor, Sohn said, is that issues such as a long-term strike of oil workers in Venezuela could keep oil prices high even if a war with Iraq appears headed toward resolution. That would affect any number of industries.

Sohn also is worried about high cost of war and the ultimate effect it could have on the weak U.S. economy.

"I can't imagine it's really a positive," Sohn said.

Still, while war may be at the forefront of many investors' minds, financial experts caution that in the long-term investors will likely become more interested in the fundamental issues that normally drive markets.

The overall economy remains weak, they say, and many will be looking for indicators of a rebound - most notably, an increase in capital spending - before the markets can really improve.

Without improvement in corporate spending, Wagner said, "I see us going sideways for quite a while."