Stock rally not guaranteed if war worries ease

Posted: Thursday, February 27, 2003

NEW YORK (AP) -- In the stock market, just as in life, things don't always go as planned. So don't be so sure of a super-sized rally on Wall Street once the uncertainties of war subside.

Sure, that's what has happened in the past. Stocks fell on worries over the Gulf War a decade ago and then started surging soon after the first shots were fired.

But there are no guarantees that history will repeat itself this time.

''The Iraq-invasion relief rally is quite possibly the most highly anticipated rally of all time,'' said Peter Schiff, president of the investment firm Euro Pacific Capital in Newport Beach, Calif. ''As a result, it will most likely never occur.''

All the uncertainty over war with Iraq is paralyzing investors. It's like they've wrapped up themselves up with plastic and duct tape and don't intend to break free until they know what's ahead.

And it's not just individual investors who are sticking to the sidelines. Professional money managers at mutual and hedge funds have curbed their buying of U.S. stocks, too, preferring to keep their money in cash or putting it into foreign investments, bonds or gold.

Many prognosticators on Wall Street believe there will be a quick resolution to the Iraq situation, which could break investors out of their funk and spur a giant market leap.

That's what happened a decade ago. After Iraqi President Saddam Hussein invaded Kuwait in the summer of 1990, the Dow Jones industrial average fell more than 18 percent over the following three months. Soon after the U.S.-led coalition invaded Iraq the following January, prices began to rise. By the summer of 1991, the Dow had gained 26 percent, according to the Stock Trader's Almanac.

After the steep market declines over the last three years, it's easy to see why investors want the market to turn its course.

But it is tough to know if just the easing of worries over Iraq will be enough to spur Wall Street to bounce back. Many of the fundamentals that drive the market remain in trouble.

''It's important for investors to understand that wars don't always follow scripts,'' said Alan Skrainka, chief market strategist at Edward Jones in St. Louis. ''All the problems in the market won't get solved just because the Saddam problem gets addressed.''

Growth in the U.S. economy is very slow. People are out of work, and the employment outlook remains grim. Inflation is inching higher, fueled largely by a big jump in oil prices.

All that is bad for businesses, which have been struggling to revive earnings as they try to work off the excesses of the late 1990s. They can't boost sales. They can't raise prices. They can't sign on new customers.

Then there is the weak dollar. That's keeping foreign investors from buying dollar-backed assets. And even though a declining dollar often spurs sales of U.S. exports, that hasn't happened, either, so the trade deficit has widened.

On top of all that, consumers, who have cushioned the economic downturn with all their spending over the last few years, are starting to show some fatigue.

And those are the known problems in today's stock market. There are plenty of possible unexpected shocks that could rock Wall Street.

To start, no one knows how the Iraq situation will play out. Will there be a war? If so, will it be quick or will it drag out for months? And if there is no war, then what happens?

Hanging in the backdrop are also worries about North Korea's nuclear weapons program and continued fears over terrorism.

''The real risk is that this might not turn out to be a short-lived and limited fight,'' said Hugh Johnson, chief investment officer at First Albany Corp.

Maybe a victory in Iraq could turn this market around.

Maybe it won't.

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Rachel Beck is the national business columnist for The Associated Press. Write to her at rbeck(at)ap.org



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