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Will The War in Iraq Help Spur the Market?

Stock Market News

April 2003

Will The War in Iraq Help Spur the Market?

As most pundits expected, the missile strike that opened the war in Iraq on March 19 spurred a worldwide market rally that ended with the Dow up 150 points. This sharp surge ended almost as quickly and dramatically as it began, as global markets reacted precipitously to the realization that Saddam’s regime would not yield without a fight, and to reports of American-led forces encountering fierce resistance in their drive to reach Baghdad. Major U.S. stock indices fell at least 3.5 percent, and sharp declines wiped out much of the big gains realized in the first couple of days of the conflict— suggesting that the run-up had been based on initial hopes that the “shock and awe” military campaign would secure a relatively swift victory.

Anxious investors eyeing the business headlines noted that the Dow saw its worse day since September 2002, but could take some comfort from the fact that U.S. indices remained well above March 12 levels, when they reached their lowest point for many months.

But, the big question remains. After the paralyzing uncertainty of the past month or so, will the Iraqi war help put the market back on track? In the past, conflict has done just that. Desert Storm unleashed a bull’s rally back in 1991, and some experts --but not all-- predict a similar outcome once victory is secured in Iraq.

As always, opinions vary. Here is a look at how the arguments stack up:

The Bullish View
Wall Street experts, who believe that the stock market will replay previous wartime rallies, caution against over-reacting to the market’s initial gyrations in response to news coverage at the beginning of hostilities. They point out that market gains historically have continued for many months after hostilities begin. Believers in a post-war stock rebound also point to the recent release of positive economic data -- stronger than expected-- and suggest that this under-current of good news has not received much attention amidst recent pessimism.
Their optimism is based on the following:

  • The recession is over, oil prices are expected to fall, and the economy continues to recover with a projected 2.6 percent growth rate for this year and 3.6 percent for 2004;

  • Forecasts of real GDP growth of 5 percent or more, and -- now that barriers to investment and expansion fueled by uncertainty no longer exist-- a return to more capital spending, inventory re-stocking and hiring;

  • Existing home sales continue to remain brisk and the recently published consumer confidence index showed fewer declines than expected.

The Bears
Many Wall Street bears believe that past historical precedents do not apply in today’s geopolitical environment, and, in addition, that stocks face an uphill battle—war or no war. Their key points of their argument involve the following:

  • This conflict will not provide the traditional post-war boost to the stock market because there are significant differences between the current Iraqi War and the 1991 Gulf conflict.

These differences include:
  1. Investors seem to be banking on victory in an extremely short time span. A lengthier process or setbacks may precipitate further market declines;

  2. America was back to business as usual after the Gulf War, but, when the Iraqi war ends, our nation most likely will brace for possible terrorist retaliation; and

  3. After the war, rebuilding Iraq most likely will require continued U.S. presence and financial support for many years. Difficulties in the re-building process could unsettle U.S. markets long after the war ends.

  4. The economy remains slack as evidenced by the fact that manufacturing capacity stands at about 75 percent today--versus 80 percent after the Gulf War--and job creation is expected to remain spotty at best.

Instead of looking to the war to give stocks a much-needed boost, these experts believe that a sustained bull market can only come from improved corporate performance. And, most of them expect earnings to remain weak, not showing much growth until 2004—and even then, they note that profits will not hit the 20 percent growth rate seen back in 1992.

These articles are intended to provide general resources for the tax and accounting needs of small businesses and individuals. Service2Client LLC is the author, but is not engaged in rendering specific legal, accounting, financial or professional advice. Service2Client LLC makes no representation that the recommendations of Service2Client LLC will achieve any result. The NSAD has not reviewed any of the Service2Client LLC content. Readers are encouraged to contact their CPA regarding the topics in these articles.

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