After a January that saw the Dow losing almost 300 points, beleaguered investors saw no respite in February as global tensions continued to bedevil the market. Despite improving economic data and more cheerful economic news, geopolitical woes trumped everything and shrouded Wall Street in deepening gloom. In addition, jitters, provoked by a purported audiotape from Osama bin Laden and the upgrading of security alerts based on detailed intelligence of pending al Qaeda deployment of a “dirty bomb” in the U.S., further unsettled investors and consumers alike.
Investors did not need more worries. Prior to February’s terrorist attack warnings, the S&P index had declined 9 percent since mid-January and major stock indices had hit four-month lows, as Washington’s war drums grew louder. Investors also witnessed market irrationality as stocks rallied not only when war looked likely, but also when it looked as if peace might prevail. Recent gyrations indicate that -- above all else --the market hates uncertainty most, and that investors will see no meaningful relief until the issue of conflict with Iraq is resolved.
Although Wall Street experts and economists disagree on whether war with Iraq would spur a stock market rally or not, many believe that months of continuing uncertainty have already inflicted significant damage. Chief among them is Federal Reserve Chairman Alan Greenspan, who told Congress in mid-February that concern over Iraq has created “formidable barriers” to investment and economic expansion. Other commentators see an upside to this anticipatory angst, believing that the worst of the damage has already been done and that today’s economy is better poised to respond to war in the Middle East than it was prior to the 1991 Gulf War.
Experts who believe that stocks will rebound after the fighting starts look to previous historical precedents to support their belief. Many of them suggest that the prospect of armed conflict rather than war itself exerts a negative psychological effect on investors.
Although no one can predict the outcome of any war, history suggests that any outcome-- short of catastrophe-- is likely to prove positive for the market once fighting commences.
This seems to be because the resolution of uncertainty gives investors a certain psychological boost.
If we look at how Wall Street responded to crises over the past few decades, we see a general pattern of initial negative reactions followed by upswings within the next few months. Here are a just a few recent examples of how the market rebounded following recent military crises. The following were all tracked over a 126-day period:
- In 1989, the Dow Jones dipped 1.9% when the US first invaded Panama and then rebounded 8%;
- The Dow rose 4.6 % in 1991 when the Gulf War was declared and then gained 15%;
- The Trade Center bombing in 1993 saw an immediate 0.3 % decline followed by a 8.5% gain; and
- September 11 terrorist attacks in 2001 saw a 14.3% drop in the Dow, followed by a 24.8% upswing.
Whilst noting that markets as a whole rally after the resolution of military conflicts, market historians see no pattern emerge as to which industries fare best in the upswing.
Perhaps the key thing to remember is that throughout U.S history despite wars, recessions and economic turmoil, the value of income producing assets has tended to increase. The American way of life and the U.S. economy have survived global conflicts, civil war, economic depression and many other serious setbacks. Despite today’s challenges, the economy is growing—albeit slowly—and, assuming the current geopolitical crisis is resolved without catastrophic consequences, stocks soon will follow.