Now that the war with Iraq has begun, the prevailing question that investors are asking
is - What effect will a war have on my portfolio? Of course the
question is largely unanswerable – but it is somewhat helpful to look at
the effects that armed conflicts have had through the years. The chart
below shows what happened to two major U.S. Market Indexes the year a
conflict actually occurred as well as in the following three-year
period:
First
of all, we can make some general observations. The effects in the year
the conflict began vary. The stock markets were largely negative in the
year World War II began and during the Cuban Missile Crisis, but were up
considerably the year the other three conflicts began. However, it is
difficult to draw much of a conclusion from this information, given the
fact that both WW II and the Cuban incident took place late in the
calendar year. Secondly, and perhaps most significantly, the average
three year period returns following the year war started were all
positive with most up significantly.
This surprising data
suggests a couple of things. Number one, it could be argued that the
effects of war on the economy were either already factored into the
markets or became factored in early in the conflict. Number two, while
the news from each conflict was at times very bad, it was still only one
factor in the world’s most powerful economy which is affected by
numerous other economic factors each day.
The impending conflict
with Iraq may most closely resemble Desert Storm for obvious reasons.
It may also contain some similarities with the Cuban Missile Crisis
which was technically not an armed conflict. However, it was an alarm
clock that awoke the American consciousness. While the Cold War was at
full throttle in 1962, it was also an ocean away. This crisis brought
the threat of ending our way of life within 90 miles of our shore - a
wake up call to say the least. Even though the crisis was averted, the
threat remained firmly imbedded in the psyche of our society from that
point on. Yet capital markets rose over the next three-year period (and
beyond), as indicated above. Similarly, we now face not only an armed
conflict, but also have had another cold slap in the face to the
American psyche in the form of a new threat on our shores - terrorism.
There is no reason to
believe that the American economy and markets will do anything other
than survive and ultimately thrive after any future conflicts - unless
we are unwilling to protect freedom and thus free markets, when
threatened. The irony is that the only way economic survival and
prosperity is maintained in both war times and peace, is to protect the
freedoms we hold so dear, which have always enabled us to recover.
Therefore, the defense of freedom is now and may it ever be the only
reason America will ever engage in war.
(4/03)
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