- The Washington Times - Tuesday, March 18, 2003

The Dow Jones Industrial Average surged 282 points yesterday after the United States and Britain dropped efforts to negotiate a new Iraq resolution at the United Nations and readied for war.
The rally, which brought the Dow's gains since Thursday to 618 points, reflected hopes that a war with Iraq would go according to Bush administration plans and be short and successful. But analysts said stocks will fall again if the war is messy, prolonged and continues to drag down the economy.
"The feeling is we're heading into an easy war," said Billy Flahive of Island Trading Group.
The Dow posted a near 4 percent gain to 8,142, and other major stock indexes mirrored its upward movement. The dollar also rallied as President Bush declared an end to six months of diplomatic efforts to disarm Iraq and urged its leader, Saddam Hussein, to step down and avoid war.
"This looks like it is the start of a long-awaited relief rally," said BNP Paribas equity strategist David Thwaites. "Markets can scent a breaking of the logjam as regards the Iraq crisis."
With the markets counting on "a short, successful war, what you're seeing is equities and the dollar going up; bonds, gold, oil going down," he said.
Prices for crude oil dropped 1.3 percent to $34.93 a barrel in New York trading even as gasoline prices at the pump hit a record high on the belief that the war will be quick and Mr. Bush will release oil from the Strategic Petroleum Reserve to fill any shortfall in Iraq's oil production.
Oil exports from Iraq have dropped to 2 million barrels this week from 10 million at the beginning of the month, analysts said. Further production cuts are likely there as well as in Kuwait in the event of a war.
Consumers this year have been daunted by record-high energy bills, with confidence plummeting last month to the lowest level in a decade, raising the specter that the consumer-led economy will fall back into recession.
Federal Reserve Chairman Alan Greenspan and many other economists believe that a quick and successful war will dispel those fears, enabling the economy to snap back with little lasting damage.
The Fed's interest-rate-setting committee is to meet today, and most analysts expect it to postpone any cut in rates to allow time to gauge how the markets and the economy are responding to the administration's move toward war.
"No one doubts the outcome: The United States will win quickly," said Edward Yardeni, chief investment strategist with Prudential Securities.
"The U.S. military must believe that victory can be achieved within a very short period of time, that is, two to three weeks. It is widely known that by early April, Iraq's temperatures are unbearably high, making fighting much tougher," he said.
"I believe that if Gulf war II goes well, then the prospects for the economy, earnings and stock prices are good," he said, though he acknowledged that a prolonged, problem-filled war would hurt the markets and the economy.
"The number of casualties on both sides could be high, especially if Saddam Hussein's military uses chemical and biological weapons. These weapons could also be used against Israel and Kuwait. Iraq's oil wells could be set on fire. The North Koreans might take advantage of the situation by escalating their provocations."
War-related worries drove the stock indexes toward six-year lows earlier this month, he said, and they may resurface in coming weeks.
While most analysts were expecting a relief rally with the end of diplomatic wrangling, not all are convinced that the market will continue to stage gains. The optimists hope for a replay of the 1991 Persian Gulf war. Six months after the start of that war, stocks were up 21 percent.
Studies have shown that after the end of a war, the market typically returns to its prewar trend. But the bear market that started three years ago was well-entrenched before the start of hostilities with Iraq, and that has led some to fear that stocks will resume a downward trend.
Steve Young, senior market strategist with Banc of America Capital Management, however, believes that stocks hit bottom in October and were at the beginning of a bull run until the focus shifted to Iraq at the end of last year and drove the market down again.
"We expect the stock market to continue this new cycle" and resume its bull run, he said, adding that a war in Iraq is unlikely to be long enough or expensive enough to have a lasting effect on the $10 trillion U.S. economy.
Containing the damage to the markets and the economy from a war may not be as easy as it was in 1991, because it is accompanied by a threat of terrorist attacks that is far more pervasive and extends beyond Iraq's boundaries, said William E. Lauer Jr., chief investment officer at Chevy Chase Trust.
"The threat of imminent terrorist attacks has cast a pall, and until there's a resolution, I can't see any sustained upward movement in the market," he said. "We need to get the Iraq situation resolved; we need to have more closure."

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