Iraq Takes Toll on Market
The stock market was mounting a rally last Wednesday, lifting the Dow Jones industrial average 125 points -- welcome news on the heels of a 61-point gain the day before.
Then came reports that a U.S. airstrike had killed dozens of people at a wedding party in Iraq. The mood on Wall Street soured. In the final two hours of trading, the Dow swung to a 30-point loss.
The U.S. was quick to dispute the wedding party reports, saying it had bombed a safe house for foreign fighters that was a legitimate military target. Nonetheless, the swift reversal on Wall Street exemplified how vulnerable the market has become to bad news out of Iraq. It is weighing heavily on U.S. investors.
“For a lot of investors the feeling is, ‘This too should have passed a while ago,’ ” said Ned Riley, chief investment strategist at State Street Global Advisors in Boston. “Now it seems like it’s taking up 60% of the newsprint in the daily papers.”
Strategists say rising tensions in Iraq are one of the major reasons the blue-chip Standard & Poor’s 500 index has cooled, losing ground for four straight weeks and nine of the last 11 in spite of robust corporate profits and data showing a healthier U.S. economy.
The market’s woes are also a sign of how “event-driven” it has become as the ranks of hedge funds and other rapid traders have swelled in recent years, analysts said.
“There are so many leveraged, speculative, sophisticated investors with the ability to react so quickly,” said Liz Ann Sonders, chief investment strategist at Charles Schwab & Co. in New York.
Evidence of that came Friday, when crude oil prices retreated from near-record highs and stocks rallied after Saudi Arabia said it would ask OPEC to boost production by more than 2 million barrels a day.
Some portfolio managers see a silver lining in the Iraqi clouds. They say if the situation there worsens and stocks sell off dramatically, that would create more buying opportunities.
“If fears are created that another Vietnam [War] will happen, that will drive stock prices to better bargains,” said Jeff Auxier, manager of the Auxier Focus fund in Lake Oswego, Ore.
“We much prefer doom and gloom: It creates the opportunity for a double or triple play,” Auxier said, referring to a stock that doubles or triples from low levels.
For now, some investors are sure to tread gingerly over the next six weeks as the double deadline of June 30 approaches. Not only is the handover of power to an Iraqi interim government scheduled for that day, it is also the second day of the next meeting of the Federal Reserve’s monetary-policy committee, when the suspense surrounding the next interest rate hike could finally be lifted.
Many believe the Iraq transition, along with the economy and the presidential election, will affect Wall Street for the rest of the year. To some extent, all three issues overlap.
Historically during election years, the stock market has done well from May through December, Sonders said. But uncertainty over the election outcome may be one reason such a rally has yet to materialize in 2004; in the past, there has often been a clear front-runner.
Indeed, strategists said the tightness of early polls has caused jitters on Wall Street, where President Bush and the status quo are generally preferred over the presumptive Democratic nominee, Sen. John F. Kerry. One fear, Riley said, is that Kerry might seek to raise taxes to balance the federal budget.
“From Wall Street’s perspective, Bush has done the correct things to stimulate the economy and get employment back on track,” Riley said. “But he is no longer a shoo-in. Now Bush is getting imperiled by our prolonged and intensified Iraq involvement.”
Perhaps more than the election outcome, Wall Street is worried about the underlying conditions that are likely to sway voters in November, said Sonders and others.
The bottom line, they say: Bush’s odds improve if the economy and Iraq are in relatively good shape, whereas Kerry’s odds improve if they aren’t.
