WASHINGTON, Sept. 12 (UPI) -- "Hence home, you idle teachers
--You miserable creatures!
The cannon are God's preachers
When the time has come for war!"
If we are to have war with Iraq, the stirring words above, written by Alexander Kinglake on the eve of the Crimean War, are undoubtedly the way to approach it. If Vietnam taught us anything, it is that wars approached in an attitude of self-doubt are never successful.
Nevertheless, in the possibly brief interval before doubting the stock market's upward progress becomes unpatriotic, as it was immediately after Sept. 11, it's worth looking objectively at what conflict, should it come, might do to the indices. After all, since 50 percent of Americans are now exposed to the stock market, either directly or through mutual funds, the question is of some importance, even in a wartime situation.
Historical evidence is ambiguous on the point. The American Revolutionary War was bearish for the London stock market, because the cost of the war drove up interest rates, and Britain losing was VERY bad for confidence. The Napoleonic Wars were bearish at first, for the same reasons -- Consols (long-term British government bonds) in 1797, at the time of the Nore naval mutiny, traded at a lower price than they were ever to reach until the socialism of the 1960s. However, later in the wars, British government "tech" spending, on such items as naval advances, rifles and the Congreve rocket, boosted British technological capability and economic growth, so markets generally strengthened.
In World War I, the authorities in both London and New York (which of course, was initially not involved) were so worried about market developments they closed the stock markets for 4-1/2 months. When markets reopened, they showed there had been little need for concern. The British market was generally fairly strong, helped by inflation, while the U.S. market saw an enormous boom, as defense related companies grew fat and happy satisfying Allied orders, while government spending remained at peacetime levels. The Dow Jones Industrial Index doubled in 1915-16, though it fell back in 1917, before ending the war just below the 1916 peak.
World War II is the poster child for wars being good for the economy, if only because it lifted the United States out of the Great Depression. However 1939-41, when the United States was not involved in the war, did not bring the gains of 1915-16; instead, the Dow declined about 20 percent during those years, as Hitler's successes spooked the market. The later years of the war, particularly 1943, were more positive, but even so the Dow ended the war around 180, only modestly above the level of 150 at which it stood in 1939, and below it when inflation is accounted for.
The Korean War began poorly for the stock market, because of early U.S. defeats, but later raised it, with the 1950-53 Dow gain being around 20 percent. The real '50s bull market, however, began in 1953-55, after peace was signed.
The start of the Vietnam War coincided with the later stages of the 1961-66 stock market boom. In the latter years of the war, however, loss of confidence and increasing inflation were negative for the market, which began its long 1966-82 slump, which took it down by three-quarters in real terms.
The Gulf War had little net effect on the market; after an initial sharp drop of around 20 percent when Iraq invaded Kuwait, indexes rebounded and ended the war close to the levels at which they began it.
The evidence is thus mixed. Supplying armaments for someone else to fight a war is unquestionably good for the stock market, and for the economy in general, but there seems little chance of the United States filling that role this time around.
The early stages of a substantial war, particularly if initial military difficulties are met with, are generally negative for the stock market, partly because of a decline in confidence, partly because of the economic and manpower disruptions war causes.
A prolonged war can go either way. If there is spare national capacity of both men and production facilities, as in 1941-45, it is generally bullish. If, on the other hand the economy is running close to capacity, as in the Vietnam years, the increased taxation and diversion of resources caused by war can restrict economic growth and cause inflation, which is bad for the market, particularly in inflation-adjusted terms.
In current circumstances, the "mildest ever recession" has left little surplus capacity, except in areas such as fiber optics and Internet servers that appear to be somewhat peripheral. War with Saddam Hussein would disrupt oil supplies, presumably leading to higher oil prices and further strain on the oil consuming U.S. economy. Hence if war comes soon, even the long-term effect of a substantial conflict is likely to be bearish, as government spending and taxation would inevitably rise, leading to inflation and "crowding out" of private business. In the short term, it is likely that an enraged Saddam would manage at least one substantial terrorist atrocity against U.S. soil, which would greatly increase the fear in an already nervous stock market. There are a number of good reasons to be bearish on the U.S. stock market at present; a war would undoubtedly add a further one, possibly of substantial weight.
There is one caveat. If war is delayed, and the stock market continues to drop, so that in two years time the Dow is around 5,000 and we have suffered a substantial recession, then the economic effect of war would be to reflate the economy and put resources back to work, as it did in World War II.
In 2004-5, a war against Saddam might be just what the stock market needs. Provided, of course, the interval doesn't give him time to acquire a nuclear capability.
