In the past few days I've heard a lot of theories about how a war against Iraq would affect the US stock market.
Some people believe that the outbreak of hostilities would release pent-up tension, lead to a quick military victory, and give the US access to Iraqi oil reserves. They think a war would inspire US stocks to stand up and salute.
Others think war would depress the national mood, drain the federal treasury, keep Middle East politics as murky as ever, and leave the US at least as vulnerable to terrorism as it is now.
They figure that war would be a depressant for the market.
As I see it, the most crucial point is not whether we go to war. It is how the war goes.
A quick and fairly clean victory, as in 1991, would be wonderful. But I don't count on that for a few reasons:
-- Saddam Hussein will not choose tactics identical to those that resulted in his resounding defeat 12 years ago. I fear that the main thing he can do differently is to fight dirtier.
-- Israel stood by in 1991, as the US requested, while Iraqi missiles zoomed onto Israeli territory. Everyone seems to assume that Israel will exercise similar restraint this time, but I do not regard that as guaranteed. If Israel gets involved militarily, we have a wider war, which I don't think the US stock market is expecting.
-- The execution of battle plans in 1991 went as perfectly as the US could have dreamed. I intend no insult to our current military leadership in saying that perfect outcomes are not often repeated.
A look at the history of US stock-market performance during wartime dispels the notion that war is always bullish or always bearish.
Let's start by looking at Vietnam War. We lost the war and 50,000 American lives.
Because it was an undeclared war, the Vietnam War has no fixed dates, but most people would agree that for the US it started in 1964 and ended in 1973. During that 10-year period, the US market was up seven years and down three.
The stock market rose a total of 30 percent over the 10 years, which works out to a compound average annual return of 2.7 percent -- well below the 10 percent average return that is considered the norm.
There were many reasons for the market's poor performance during the Vietnam War, and some had nothing to do with the war -- the Arab oil embargo, for instance, and the Watergate scandal that led to the resignation of President Richard Nixon.
Still, the fact that the Vietnam War was costly, divisive, lethal and ultimately unsuccessful was in my opinion a major reason for the market's weakness over the 10-year period.
The Gulf War of 1991 was another story. US stocks declined 9.4 percent in August 1990, the month Iraq invaded Kuwait. They fell another 5.1 percent in September and 0.7 percent in October.
At that point, preparations for war against Iraq were well under way.
Stocks then rallied for seven straight months, including the late stages of the military buildup and the months during which our troops were in battle. The U.S. achieved its major objectives with a loss of only 151 American lives.
For the four months of US military action, January through April 1991, stocks rose close to 14 percent.
John Dorfman is head of Dorfman Investments in Boston. The opinions expressed are his own.
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