Sun, Mar 23, 2003 page12

• History shows that war can help or hurt the US' stock prices

  When there is perception that US business would benefit from a war, as in World War I, prices rise, but if the US is caught off guard prices can dive up to 37%

  • By Floyd Norris / NY TIMES NEWS SERVICE
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  The guns began to roar this week, and stocks began to soar, not just in the US but around the world.

  Something similar happened in 1991, when the allied bombing of Iraq began.

  But that does not mean wars are always good for stocks.

  Broadly speaking, US stocks rise during wartime when traders think events have turned in the country's favor.

  American share prices fell sharply at the beginning of World War I, World War II and the Korean War. They also fell after Iraq invaded Kuwait in 1990. But in each case they recovered, sometimes before it was clear that the war news was improving.

  One of the worst weeks ever for the stock market came during the week of May 18, 1940, when the Dow Jones industrial average fell 15.4 percent as the French army crumbled in the face of the German invasion.

  The Dow continued to slide as the war went on and fell 6.5 percent during the three days after Japan attacked Pearl Harbor. The market did not bottom until the spring of 1942, when the Dow was down 37 percent from where it had been just before the Battle of France began. But prices began to pick up even before the Battle of Midway in June 1942 signaled that the fortunes of war were turning.

  By the time the war ended on Aug. 14, 1945, the Dow was up 77 percent from its 1942 low but was only 14 percent above its level Germany attacked France.

  In the final week of July 1914, as it became obvious that a war was about to begin, prices on the New York Stock Exchange fell 11.5 percent during the first four days of the week and appeared likely to open sharply lower on July 31 as sell orders poured in from Europe. The exchange was ordered closed and did not reopen until Dec. 12.

  By then, it appeared clear that American business was benefiting from war-related orders and the Dow ended the first day up 4.4 percent from the prices just before trading had halted. By the time the US entered the war, on April 6, 1917, the Dow was 73 percent higher than it had been when the market reopened. But it slipped over the remainder of the war, which ended in 1918.

  The Dow fell 4.7 percent the day after the Korean War began on June 25, 1950, and was down 12 percent within a month. But it recovered all that lost ground by mid-September as American forces staged a dramatic invasion of Inchon that assured there would be no quick North Korean victory.

  The Vietnam War sort of crept up on American consciousness. But many stocks peaked in 1966, not long after the US involvement was escalated in 1965.

  And by the time the war finally ended, in 1975, the US economy had gone through a severe recession and share prices were far below where they had been in the mid-1960s.

  The Persian Gulf war is remembered as a boon for stocks, but that was not how it seemed when hostilities erupted. The Dow fell 6.3 percent during the three days after Iraq invaded Kuwait on Aug. 2, 1990, and was down 19 percent by the time prices bottomed in October.

  Share prices shot up 4.6 percent on Jan. 17, 1991, after the beginning of the international attack on Iraq. And by the time the war ended with a cease-fire on March 3, the Dow was back to where it was before the Iraqi invasion began.
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