Market’s Scenario: A Short War Followed by Strong Stock Rally : Wall Street: Investors are already acting on these assumptions. But, they say, a prolonged conflict could devastate the markets.
The mood among the nation’s investors is that war is coming but that it will be short and followed by a tremendous stock rally.
If that short-war scenario is wrong, however, many experts say, the consequences for the markets will be devastating.
Wednesday’s plunge of 39.11 points in the Dow Jones industrial average, after fruitless peace talks between Iraq and the United States, was a fairly mild reaction considering the gravity of the event, market analysts say.
“The question I’ve had for some time is how much of a potential war is already reflected in the market,” said James Caywood, principal at money manager Caywood-Christian Capital in San Diego.
The relatively small decline in stock prices Wednesday “tells me that a good bit (of the war) is in the market now,” he said.
In Wall Street parlance, that simply means that Wall Street has long expected a war between the United States and Iraq and that stocks have already been knocked down in price to account for any further economic disruption from a conflict. That is the market’s usual role: It anticipates events, so that the actual occurrence often is greeted with little or no reaction.
Indeed, the Dow average, which closed at 2,470.30 on Wednesday, now is down 18% from its peak of 2,999.75 just before Iraq invaded Kuwait last Aug. 2.
Although the nation overall undoubtedly will be emotionally engulfed by a war, Wall Street has a much more pragmatic--some would say cold--view of the situation.
Most big investors expect the United States to strike a killing blow in short order, ending the Iraqi threat. That, in turn, will lead to restoration of normalcy for the world and the resuscitation of economic growth here and abroad--and thus a new surge in stock prices, many investors believe.
“The moment of truth is approaching,” says Martin Sass, head of M. D. Sass Investors in New York. “If we are going to war, we are going to win, and we are going to win relatively quickly,” he contends.
If the vast majority of institutional investors saw any scenario other than Sass’, the market would have been in a virtual free fall in recent weeks, analysts say. While the Dow has fallen for six straight days since the new year began, trading volume has been anemic, and many traders say the sellers have mostly been individual investors.
Donn Tognazzini, senior vice president of money manager Starbuck, Tisdale & Associates in Santa Barbara, says his firm is “much more a purchaser than a seller” of securities now. “Our outlook is that the effect (of war) on the economy will not be that noticeable,” he says. “We see people with lots of cash waiting to pick up high-quality equities.”
Stan Trilling, a veteran broker with Paine Webber in Los Angeles, agrees that investors should be ready to pounce on good stocks that may slide further at the start of a U.S.-Iraq war. “This war may not last even one week,” Trilling says. “I’m telling (clients) to prepare for war--and get ready to take advantage of screaming buys in quality stocks.”
But Trilling admits that “I’ve not had very good luck convincing people that there are values out there.”
In fact, some analysts wonder whether individual investors, who apparently have been heavy sellers of stocks in recent weeks, may be approaching a U.S.-Iraq conflict far more intelligently than institutional investors.
When pressed, many big investors admit that it is dangerous that they all seemingly agree that a war would be short and relatively painless for the markets. The stock market, after all, is notorious for proving the majority view wrong.
“When everybody gives you the same response, you do have to question whether it can be right,” Tognazzini says.
Another money manager says privately that he fears Wall Street is grossly overestimating the capability of untested American troops in the desert--a theater the Pentagon hasn’t fought in since World War II. “I think they’re smoking dope” talking about an overwhelming and fast victory, this investor, a Vietnam veteran, said of his peers.
What is particularly worrisome is that virtually all big investors say they would begin dumping stocks at the first sign of a prolonged U.S.-Iraq war. The question is, how long is too long? And what happens if a few institutional investors begin to sell heavily, striking fear into others that the market has decided the conflict is going badly for America?
Many big investors say they can’t answer those questions. For now, they are betting the ranch that Iraq will be finished quickly. “Maybe we’re foolish,” says DeWitt Bowman, chief investment officer for the $57-billion California Public Employees Retirement System. “But if war comes, we expect it to be brief.”
Volatility in the Markets The Dow 30 Every 15 minutes Tuesday close: 2,509.41 Baker Press Conference Wednesday Close: 2,470.30, down 39.11 Oil Prices Every 15 minutes Feb. contract, N.Y. Merc Tuesday Close: $27.17 Baker Press Conference Wednesday Close: $27.26, up 9 cents Source: Bloomberg Financial Markets via Associated Press
