As America turned a new page in its war against terrorism this weekend, market watchers looked to history as a guide.
Most wars in which Americans have fought have been good for stocks, at least in the long term. The markets did not respond favorably, however, to the war that most closely resembles the one shaping up against terrorism: Vietnam. That extended, uncertain campaign was followed by a 20% market decline in 1973-74. Although some of the factors are different, economists point to an economy overstimulated by government spending as the main culprit then, and possibly its biggest peril now.
To be sure, most of the textbook analysis suggests there's little to worry about. "The message of the charts is clear," said John Bollinger, head of EquityTrader.com. "In the vast majority of
wartime circumstances, the markets correctly anticipated a conflict, and they bottomed shortly after it began."
In the weeks after the U.S. began bombing Iraq in Operation Desert Storm in January 1991, for example, the Dow rallied almost 12%. A year later, it was up almost 24%.
Nearly 50 years earlier, one day after Japanese planes bombed the U.S. naval base at Pearl Harbor in Hawaii, the Dow fell 3.5%. But a month later, it was up 1.5%. A year later, with the world embroiled in war, the Dow had held its ground, staying essentially flat since the sneak attack on America's shores.
Then there's Vietnam, which the market initially supported. In the year following the 1964 Gulf of Tonkin resolution -- which committed American troops to the war -- the Dow rose 5%. What caused the subsequent recession of 1973 and 1974, experts say, was inflation. "You can't say the market reacted negatively to the war," said Samuel Hayes, professor of finance at Harvard Business School. But by 1969, "there was too much money chasing too many goods. Interest rates were pushed up and stock prices were pushed down."
On top of what the government was spending on the Cold War, the interstate highway program, and the Great Society, it was paying for a huge buildup of military power. Once again, the U.S. government is preparing for fiscal stimulus. But some analysts think the situation is different: "I don't think the deficit spending is likely to be a problem for the market," said Hayes.
Others aren't so sure. On the plus side: "I don't think, unless this turns into a larger conflict, that this is going to be seen as a war market," said Howard Simons, professor of finance at the Illinois Institute of Technology and a contributor to
. "The only real danger is that 20 years of fiscal discipline is shot out of the window."
It should also be noted that the attacks on the World Trade Center and the Pentagon were unprecedented in world history. Nearly as unprecedented was a four-day suspension of equity trading, the longest closure since the Great Depression. The events sent equity markets into a tailspin, and when trading resumed on Sept. 17, the Dow closed down almost 700 points.
By this weekend, though, the world had come to grips with its new reality, and the military actions taken by the U.S. and Britain in Afghanistan already were priced into the market. Between Sept. 10 and Oct. 5, the
Dow Jones Industrial Average had fallen more than 5.6%. But on Monday, one day after the bombing started, the Dow dropped only 56.67 points, or 0.6%, to 9063.10.
"We knew the U.S. was planning an attack," said Stanley Nabi, managing director of Credit Suisse Asset Management. "The market doesn't discount the same thing twice."
"With rare exception, the declines triggered by events ought to be bought," said EquityTrader.com's Bollinger. In a study following the Sept. 11 attacks, Bollinger looked at 27 events from 1935 ranging from an assassination, to terrorist acts, to nuclear disasters, to wars. His conclusion: Bad news doesn't mean bad markets.
Nobody expects the current fight to be another Vietnam. But there are things that make this war different. It isn't a battle against a nation, but against terrorism. That has some traders nervous.
"This is different," said Peter Coolidge, managing director of trading at Brean Murray Foster Securities. "Americans are threatened directly."