Setbacks in Iraq set Dow reeling

Read on.. By TOM WALKER The Atlanta Journal-Constitution

Wall Street's rose-colored glasses, which last week envisioned a quick victory in Iraq, were shattered over the weekend by televised images of death and other troubling signs that the war might take time.

That realization translated on Monday into a steep stock market sell-off, with the Dow Jones industrial average plunging more than 300 points.

Each of the major stock indexes lost 3.5 percent or more in their worst session since last September. Airline, hotel and entertainment stocks took big hits on investor concern that travel and leisure industries would be big victims of an extended war.

Last week, investors were buoyed by hopes that the war's initial successes against Iraq would lead to a repeat of the relatively short and successful 1991 Gulf War against the same country.

But the U.S.-led coalition encountered stiffer resistance over the weekend, resulting in casualties and the first U.S. prisoners of war. Iraqi President Saddam Hussein vowed to make the war painful, and President Bush on Saturday repeated a statement he had made in announcing the start of hostilities -- that the war would last longer than some had predicted.

"Over the weekend, it was clear that those hopes were misguided, and that the road to Baghdad would be difficult," Prudential Securities strategist Larry Wachtel said Monday.

A sidelight to Monday's session was the fact it was also the third anniversary of the all-time closing highs for two major stock market indexes: the Standard & Poor's 500-stock index and the Wilshire 5000 index of market value.

That's the date most Wall Street analysts use as the beginning of the current bear market. Since that date, the S&P 500 has fallen 43.4 percent, and the Wilshire 5000 shows that investors have lost $7.56 trillion in market value.

The market's closing prices last Oct. 9 are the lows for this bear market. But before the war started, some strategists had begun to speculate that stocks could drop to new lows, given the economy's weakness and the slow recovery of corporate profits.

Optimists argued, on the other hand, that once the war against Iraq was over, consumers would feel free to spend, business firms would be confident enough to make investments, and the stock market would rally on a wave of improving profits.

That's still the big question, since the end of the war will not mean the end of the U.S. presence in Iraq.

And other global trouble spots won't go away either, said Salomon Smith Barney strategist Tobias Levkovich, "including North Korea, Venezuela and Nigeria."

But if investors were overly exuberant in expecting a quick war, there's no reason to be overly bearish on the downside because it will be difficult to predict, some analysts insist.

Balentine & Co. market analyst Dorsey Farr still anticipates a boost to the economy once the war is over.

"My argument is that the two missing ingredients in our economy -- capital spending and job growth -- are being hampered by the uncertainty of war. The successful resolution of the war eliminates that uncertainty," he said.

The risk, he said, is that a prolonged war would have a sustained negative impact on oil prices, which would indeed hurt the economy.

On Monday, crude oil prices posted the biggest gain in 15 months on the same concerns of a longer war than originally anticipated, while the dollar fell against the euro.

The Dow, which had experienced eight straight days of gains before Monday, closed at 8,214.68 with a loss of 307.29 points, or 3.6 percent. It was the biggest loss since Sept. 3, when it fell 355.45 points, or 4.1 percent.

The S&P 500 index fell 31.56 points, or 3.5 percent, to 864.23, also its worst day since Sept. 3, when it dropped 3.5 percent.

The Nasdaq composite index of mostly tech stocks fell 52.06 points, or 3.7 percent, to 1,369.78, its biggest drop since a 3.9 percent loss on Dec. 9.