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Resolution in Iraq could help stabilize Wall Street

| Sunday, Feb. 9, 2003

Increasingly, one issue is dominating the stock market. The prospect of a military confrontation somewhere, most likely in Iraq, is overwhelming the state of the economy, corporate earnings and anything else normally associated with stocks.

Most of the recent stock market references concerning pending action against Iraq invariably cite the 1991 market experience as a potential guide to what might happen should a similarly repugnant political situation envelop the market again. These references are quick to point out that from the beginning of the Gulf War to a month later the Dow Jones Industrial Average gained 16.97 percent (524.80 points), which would equate to 1,337 Dow points today.

The first U.S. attacks began on Jan. 16, 1991, at 7:15 p.m. Eastern Standard Time. Everyone remembers clearly what happened the morning after the U.S. began bombing Iraqi military installations. On Jan. 17, the Dow posted a 114.60-point gain (4.56 percent, or the equivalent in today's terms of 359 Dow points). The next day the Dow inched higher, but that was the high until Jan. 25.

Between Jan. 18 and Jan. 25, the Dow fell back for two sessions and then crawled back up for the next three days to get back to the Jan. 17 closing level. The hesitation after the initial surge higher came alongside disquieting news. For example, on Jan. 19 three Scud missiles exploded in Tel Aviv, Israel, injuring about 17. On Sunday, Jan. 20, Iraqi television aired interviews with captured allied airmen. Iraq also fired 10 missiles at Saudi Arabia. Fortunately, none of them reached their marks. The next day U.S. officials said despite more than 8,000 flights by U.S. aircraft in five days, mobile Scud missile launchers remained a threat. Iraq said it had scattered prisoners of war as shields at allied air targets. Tuesday, Jan. 22, Iraq fired six Scud missiles at Saudi Arabia with none reaching their marks this time either. Then, Iraq began setting Kuwaiti oil wells on fire, and one Scud got by U.S. Patriot missiles and hit Tel Aviv, killing three people. Then on Wednesday, Jan. 23, two enormous oil slicks began moving south of Kuwait.

Once the Dow got back to where it had peaked on Jan. 17, it remained essentially flat until Jan. 30 when it became abundantly clear the U.S. would prevail quickly. From Jan. 30 through Feb. 15, the Dow advanced 272.10 points (10.22 percent), the equivalent of 805 Dow points today.

Additional fuel for those who hope for a similar outcome to the 1991 experience is the fact that from its peak in July 1990 at 3,024.30, the Dow by Oct. 11, 1990, reached a bottom 680 points lower, a drop of roughly 22 percent. From there, however, the economy and the market were on an upturn until everyone's attention was riveted on the possibilities of an armed conflict in the Gulf. Arguably the same might be said now relative to the market and the economy following the bottom in the Dow that was reached Oct. 10, 2002, down 21 percent from its most recent high point. Until about three weeks, ago the market was acting rather well.

No one should rest all that easily making assumptions about whether the 1991 experiences will be repeated today. In fact, the similarities have been discussed so much lately it almost suggests the outcome might not be the same only because many people think it will be.

A quick end to the Gulf War does not mean any military confrontation with Iraq would be over as swiftly this time, and the world political situation is more complex now.

A resolution to the current crisis, however, at least temporarily should lift a major burden off the market's shoulders. As was true in 1991, the economy is getting slowly better. Improvements in 1991 were not coming along at a swift pace either, but the threat of a war was enough to make it appear the recovery was less vigorous than it was.

It may not be a time to dive into the market with both feet, but it also does not appear to be time to divert too much attention elsewhere either, at least not if the current situation becomes a reprise of the 1991 experience.

One word — if — is a crucial element in the equation, but then the same word was just as important in 1991.

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