Market Watch : Threat of Mideast War Stirs Up Wall St. Bears : Investment: Unlike during past conflicts, analysts doubt stocks would rally after an initial drop. The reason is the impact of an oil cutoff.

SAN FRANCISCO — War, or even the threat of it, is always hell for the stock market. And if it brings inflation and recession rather than an economic tonic, it could be anguishing indeed for investors.

Although the market can rebound nicely after the onset of war--as it did in World War II and the Korean conflict--the Mideast hostilities that started with Iraq’s Aug. 2 invasion of Kuwait could usher in a punishing bear market, some stock watchers say.

“This crisis is being perceived as real, with the potential for being prolonged, and raising inflation throughout the world,” said Ken Ackbarali, senior economist with First Interstate Bank in Los Angeles.

A long Mideast standoff or a war, he added, would drive many investors out of the stock market entirely and into investments that they viewed as safer, such as Treasury bills.

Markets generally dive when war clouds gather, analysts said last week. “What happens is that the first reaction in crisis is sell, because there’s nothing like cash in an emergency,” said Michael Metz, a market strategist with the Oppenheimer & Co. investment firm in New York. “Then they take a second look.”

Stock prices plunged at the start of World War II and the Korean conflict. But within months in those cases the market embarked on long rallies, as the country ramped up its war effort and the economy reaped the benefits of stimulative spending.

In the current situation, analysts said, even a second look might not provoke investors to bound optimistically back into this market. That would be especially true if it appears that the United States will begin shooting it out with Iraqi forces in the Middle Eastern desert oil fields, thereby threatening a massive disruption of world oil markets.

Since just before Iraq’s invasion of Kuwait, the Dow Jones industrial index has fallen 12.6% to 2,532.92.

In times of crisis starting with World War II, the stock market has tended to slump for six to eight weeks, with the Dow index dropping 12% to 22%, according to a New York securities broker whose firm did not want him quoted by name.

Once past the urgent selling, the fever has generally been broken with what the broker called a “9-to-1 reversal day.” On this pivotal day, the volume of rising stocks exceeds those of falling stocks by a ratio of 9 to 1.

Stock prices often sink lower after that, but the market is usually more tranquil and a recovery then begins in earnest.

That was the case in World War II. As the war got under way in Europe, the U.S. markets slumped. When the German army rolled across France in May, 1940, panic selling sent the Dow down 25% in a single month.

In December, 1941, the Sunday bombing of Pearl Harbor and entry of the United States into the war sent one key stock index down 4.4% that Monday, and 3.2% the next day.

Those were “quite large drops,” said David M. Cutler, a researcher with the National Bureau of Economic Research in Cambridge, Mass., and co-author of a study on what moves stock prices.

The Dow bottomed out in April, 1942, at 92. Late that year, however, the U.S. victory at Guadalcanal restored optimism that the Allies would win the war, and the market headed into a bullish phase that brought the Dow to a top in mid-1946 of 212 points.

War was “a clear-cut positive” for the market, said Arnold Kaufman, editor of Standard & Poor’s Outlook, an investment advisory publication in New York. Gearing up for battle yanked the economy out of depression.

Another bull market began in 1949, interrupted briefly by the outbreak of hostilities in Korea the next June. After a two-month hiccup, the market bobbed steadily upward until peaking in late 1953 at 300.

President John F. Kennedy’s October, 1962, confrontation with the Soviets over shipments of missiles to Cuba was the next military crisis to face the markets. But it was short-lived, with the market plunging 2.67% one day in panic selling, only to rebound 3.22% the next when the Soviets sent a letter stressing their desire for peace.

It’s difficult to measure how the nation’s decade-long presence in Vietnam affected the markets. Throughout that period, beginning with the official U.S. entry in 1964, the glum nation was beset by economic woes and civil strife as the war dragged on. The market bounced around, with the Dow bottoming in May, 1970, at 631 and peaking in January, 1973, at 1,051.

Yale Hirsch, publisher of the Stock Trader’s Almanac in Old Tappan, N.J., likens the current crisis to the 1973 Yom Kippur war and the ensuing decision by Arab oil producers to embargo the United States because of its support of Israel.

“That caught us by surprise,” Hirsch said. The Dow index sank 20% from October to December, and the market continued to take a beating as the nation dived into recession in 1974 and 1975.

The second oil shock occurred in 1979, when Iran’s revolution briefly cut off that nation’s oil shipments to the West.

And what about a “third oil shock,” should war erupt in the Mideast?

“There’s real reason to be concerned,” said Daniel B. Nelson, an assistant professor of econometrics and finance at the University of Chicago. “If a shooting war lasted very long, that would be very bad for the economy and the markets.”

CONFLICT AND THE DOW

Compiled by Melanie Pickett

The uncertainty surrounding Iraq’s invasion of Kuwait has sent an already uneasy stock market into further confusion in recent weeks. A look at the Dow Jones industrial index during earlier conflicts may provide a few insights of what might be ahead for the market. (The market during the 10-year Vietnam conflict was omitted because it showed no clear trend).

Source: Dow Jones