Waging war against Iraq sure beats waiting for it. Such is the view of US investors, who have bid up the Standard & Poor's 500-stock index by 2.5 percent since the war began on Wednesday night and 7.5 percent for all of last week. Investors seem grateful for reports of successes on the battlefield, given that domestic economic news continues to be grim.
Though it is understandable that investors, fed up with a 3-year-old bear market, would seize on positive war news as a reason to buy stocks, such a focus is exceedingly narrow. Some market strategists say that it does not take into account some real market risks -- and that it means a return to unreasoned and potentially dangerous speculation.
"People are too focused on the war," said Richard Bernstein, Merrill Lynch's senior US strategist. "Jobless claims are over 400,000 for five weeks in a row, and people don't care. The Philadelphia Fed report is bad; people don't care. I think the argument you will hear from most people is the market's going up and the market is telling you something. If that's the justification for why one should be bullish, it shows that speculative fervor has returned to the market."
Investors may be hoping that history will repeat itself. As James B. Stack, president of InvesTech Research in Whitefish, Montana, noted, military conflicts are often followed by higher stock prices.
"We looked at wars and the market, and in almost all cases the market was higher 6 months and 12 months down the road after an initial sell-off," he said. "One important aspect of a conflict is that during times of turmoil, it gravitates the public toward patriotism and that patriotism toward confidence. After the longest bear market in 60 years, what Wall Street needs more than anything is a shot of confidence."
There were also technical aspects to stocks' advances once war seemed certain. Many who had bet against stocks decided to close out their positions rather than be run over by an emotional rally.
Investors who had been selling were, at least temporarily, buyers.
Because the market is known for spotting economic rebounds well before they occur, many investors are starting to view the bounce in the S&P -- almost 12 percent since March 11 -- as an indication of the long-awaited turn. But such rallies have occurred before, only to fizzle when the weak economy proved unable to sustain them.
The fact is, the recent momentum in stocks must be backed by higher corporate earnings, which can come only if the economy improves. But corporate spending remains moribund, consumers are nervous, and layoffs keep coming. Stocks are a rare bright spot. Bright, and increasingly expensive.
"One could say we're in a growth recession because we're not really experiencing the level of growth to absorb the labor that's available," said Dimitri B. Papadimitriou, an economist and the president of the Levy Economics Institute of Bard College in Annandale-on-Hudson, New York. "Since what has been proposed by the president in terms of fiscal stimulus isn't going to have an impact, and my suspicion is the private sector will continue to rein in expenditures, we are on a recession path."
Perhaps the biggest risk is that consumers will discover the joy of saving. Their spending has kept the economy afloat, but that pattern may be winding down. In a study by NPD Group, a market research company, only 14 percent of consumers said they planned to spend more than usual this spring; 41 percent planned to spend less. Crushing consumer debt levels may be forcing these cutbacks. Another likely culprit is continued layoffs.
"The debt burden at the corporate level may have peaked," said William W. Priest, a managing partner at Steinberg Priest & Sloane Capital Management in New York. "But at the consumer level it's been masked by rising home values. I think unemployment at the end of this year will be higher than it is today. We are going to struggle most of this year with the fact that final demand will be below most expectations; corporate earnings will be up but probably below expectations."
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