Quick war could spur stocks
By Anitha Reddy
Washington Post
While political analysts and the news media debate how a war in Iraq might play out, many mutual fund managers, investment strategists and financial advisers have already come to the same conclusion: It will be short, and its effect on the market will be sweet.
Wall Street's consensus seems to be that the first bombs over Baghdad, a coup, or Saddam Hussein's self-imposed exile — or any scenario that could herald a resolution to the confrontation — will set off a relief rally.
"The market will be queasy in the run-up to the event, but we need to be in a positive position to take advantage of the outcome," said Alfred Kugel, senior investment strategist at Stein Roe Investment Counsel LLC, a money-management firm in Chicago. "It could all happen pretty fast."
After a New Year's rally, the market has been paralyzed by the possibility of war in Iraq. The Dow Jones industrial average has fallen 12.3 percent since it peaked Jan. 14, and the Nasdaq composite index has fallen 12.5 percent in the same period.
With retail investors too scared to participate and institutional managers sitting tight until international tensions ease, the market's trading volume has been unusually light — making it easier to push stock prices around and leading to heightened volatility, according to analysts.
But mutual fund managers and strategists say they have been trying to ignore the market fluctuations and have made only minimal changes, if any at all, to their asset selections. For instance, Stein Roe hasn't altered its investment strategy or sector weightings because of war talk, according to Kugel, because the shop is agreed that the war itself will probably be brief and successful.
Predictions on what happens to the stock market next reflect the fund managers' views on the health of the economy. "We have not made a lot of changes over the short term," said John Calamos, chief executive of Calamos Investments, an institutional money manager and mutual fund company in Naperville, Ill. "We have not gone to cash. What we've done is really tried to look beyond that — six months, 12 months, 18 months out. Is the economy improving? What are the earnings trends?"
Investors point out that during the January earnings season, many companies managed to meet analysts' expectations and post significantly improved profits over last year. Of course, those expectations had been progressively deflated near the end of the year, and better margins came from relentless penny pinching, not improved sales.
Still, many strategists believe that war fears are artificially stalling the market and the economy and that both are healthier than they appear.
"A lot of the reason the equity market is being held down is uncertainty related to the war," said Heydon Traub, who is in charge of global asset-allocation strategy at State Street Global Advisors in Boston. "If war does begin, it won't be long before uncertainty lifts and people will begin to invest idle cash and companies improve capital spending," he said. Traub said the firm also feels no need to flee to traditional wartime sanctuaries, such as precious metals or cash.
Calamos also said he thinks that the economy is improving and that capital spending is rising, even if only from what were admittedly dismal levels during the past two years.
Like several other investors, Calamos said he is not buying defense stocks because their shares have already been bid up in anticipation of war.
There are, of course, some who are skeptical that there will be any kind of rally, even a brief one. Most fund managers point out that the market climbed when the Persian Gulf War began. But David Tice, who runs the short-selling Prudent Bear Fund in Dallas, noted that the market had also fallen before the start of the 1991 war. In contrast, the stock market today is trading near September levels, he said.
Since it hasn't dropped like the last pre-war market, there's no reason to believe it will go up, he said. "There's a lot of complacency. We're not sanguine at all."
