Less than two weeks into the war, the Iraqi military has proved more resilient than Wall Street expected. Now the question is, how resilient will the stock market be?
The ebullience drained out of the market last week after events forced investors to discard the initial rosy scenario of mass surrender by enemy forces, a warm embrace from Iraqi civilians, and a quick and relatively painless regime change.
True, the Dow Jones industrial average gave back only about one-third of the 1,000 points it had gained in the eight-day rally leading into the war's first weekend.
And after a 307-point swoon last Monday, the market seemed to stabilize a bit, recovering each day from early selling to post either a gain or only modest losses.
But the psychological damage seemed to run deeper.
New York Stock Exchange trading volume shrank 20% last week from its average during the rally, and the slowest day of the week was Friday. Meanwhile, yields on Treasury securities, which had jumped on hopes of a quick American victory, reversed course as money flowed from stocks into the perceived haven of U.S. government securities.
In seven days, analysts said, many investors went from feeling they couldn't afford not to be in the stock market to feeling it's safer on the sidelines after all.
Brian S. Wesbury, chief economist at Chicago-based Griffin Kubik Stephens & Thompson, noted that the mid-month rally began not when the shooting started but a week earlier, when it became clear that the United States was going to war.
"It's not that the market wanted war," he said. "It didn't want ambiguity. Now people are trying to judge if there's another period of ambiguity."
That appeared to be the case last week. U.S. and British commanders, while warning that the war would take longer than many Americans may have initially hoped, gave generally upbeat assessments of their forces' progress. But interspersed were reports of suicide bombings, civilian casualties and supply problems among coalition forces.
Some fear that Wall Street may stumble back into its pre-war rut, a see-sawing "traders' market" reflecting consumers' reluctance to spend and companies' reluctance to invest in their own businesses, while everyone waits for some undefined signal.
For the moment, the signals getting the most attention are coming from the television screen. More than at any time since the Sept. 11 terror attacks, people at home and at work are locked into the unfolding events in Iraq.
Regardless of how the war is going, such a focus can upset the consumer economy, Wesbury said. In December 1990, the month before the Persian Gulf War, retail sales dipped 0.8%, he noted. Then in January, when the battle for Kuwait filled the news, sales sank 2.2%. The war ended quickly and sales picked up again, rising 1.6%, 0.6% and 1% in February, March and April, gaining back all the lost ground.
In a longer conflict, such damage could take longer to repair.
"If they watched Fox News, the markets would do better," joked Richard I. Sichel, chief investment officer of Philadelphia Trust Co., referring to the fact that many observers consider Fox to be more supportive of the Bush administration and more upbeat about the progress of the war than other networks.
But as the war grinds on, investors won't react to every twist and turn with 300-point rallies or sell-offs, Sichel said. "They'll start to say, 'Let's look at something else,' and in a few weeks, the something else is going to be first-quarter earnings."
After a relatively strong fourth quarter of 2002, most analysts were expecting first-quarter corporate earnings growth to be more modest before improving along with the economy later in the year. But again the war adds a wild card to that outlook.
Vincent Boberski, chief strategist at RBC Dain Rauscher in Chicago, is projecting 3% growth for the economy in the second half of this year and increasing momentum for corporate earnings, with year-over-year gains of 5% to 7% in the second half of 2003 and 8% to 12% in the first half of 2004.
However, he said, "if the war were to drag on past the second quarter and if it would have the broad effect of giving businesses the excuse not to continue investing, our forecasts would be in jeopardy."
For Wesbury, the crucial time period is four to six weeks. If the serious fighting lasts much longer than that, he said, other U.S. enemies could become emboldened, and allies such as British Prime Minister Tony Blair could be weakened by intensifying antiwar efforts.
"The longer it lasts, the more the world situation starts to decay and break down in other areas," he said. "What looked like it was all fixed could get unfixed."
More optimistic was fund manager and newsletter editor Louis Navellier.
Navellier said that although he does not believe the war is about oil, investors still can take comfort from the fact that U.S.-led forces already are in control of a significant number of Iraqi oil fields.
In fact, although oil prices rebounded to just above $30 a barrel at the end of last week, they are still down 20% from their prewar peak. A coalition victory in Iraq, achieved with minimal damage to the country's oil fields, would likely depress crude prices further -- giving a boost to both consumers and businesses pinioned by surging energy costs.
That kind of long-term perspective appeals to market analysts such as Liz Ann Sonders, a New York-based strategist for Charles Schwab & Co. Two weeks ago, Sonders raised her stock recommendation to a more bullish stance and hasn't seen anything since then to change her mind.
"The stock market is incredibly myopic now," she said. "Its time horizons are hours, not even days."
Sonders believes the myopia is a short-term phenomenon and that investors will soon step back and see the big picture, which to her is the near certainty that Saddam Hussein will be toppled and the region will become more stable.
"Is the world going to be safer for my kids?" she asked. "I think the answer is yes."