Stocks and War, Part II
Chart of the Week for September 20-26, 2002
The stock market’s fall this week, and over the past few weeks, certainly has been affected by some weaker economic reports and by some lowered earnings forecasts. Those items are contained in professional investment analysis, and changes typically are reflected immediately in the stock prices of affected companies. However, there is a third element driving the markets: W-A-R. The uncertainty of war with Iraq has caused the stock market to fall every time the probability of attacking Iraq increases. Occasionally those odds have decreased, and the stock market has rallied-- for example, early Tuesday when Iraq offered to allow UN inspectors full access. The most dramatic market effect is the prospect of a unilateral war -- that is, the US attacking Iraq without UN or allies backing. That prospect appears to have increased following the Iraq announcement, as the stock market declined over 300 points.
What’s an investor to do? Take a look at last week’s Stocks and War chart-of-the-week again. Note that when war uncertainty diminishes or disappears, the stock market has tended to rise back to "normal"-- meaning investors go back to using mainly economic and earnings forecasts to value stocks. Therefore, in the uncertain periods, the best course has been to maintain a properly diversified portfolio, focusing on the long-term.
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