Strikes May Bring Relief to U.S. Stocks, Economy

Sunday's launch of a U.S.-British military offensive against Afghanistan could hurt U.S. stocks at first — but it could also bring relief to an American economy beset with uncertainties and set the stage for a stock rebound.

Since the Sept. 11 attacks by hijackers who slammed airplanes into the World Trade Center in New York and the Pentagon, killing thousands, a cloud of uncertainty has hung over the global economy as businesses from airlines to restaurants laid off employees. 

The strikes could actually help confidence, assuming that there are clear and visible successes. 

"It's a lot worse waiting,'' said economist Joel Naroff of Naroff Economics Inc. in Holland, Pa. "Assuming everything goes well, it's the start of a process that people will finally feel good about. But right now, we don't know a whole lot.'' 

The Gulf War more than a decade ago offers a precedent, with a period of unease setting in after Iraq invaded Kuwait in August 1990 that lifted suddenly when a U.S.-led coalition struck against Iraq in January 1991. 

"We learned from the Gulf War that what really hurts the economy and the stock market is not knowing what is going to happen,'' said economist Sung Won Sohn of Wells Fargo Bank in Minneapolis. 

Market History

History shows that Wall Street always pounds stocks in the immediate aftermath of military action, but things start looking up as investor panic fades after a few months.

A check of six events in U.S. history since 1898 shows that the Dow Jones industrial average, the oldest U.S. market benchmark, falls in the days immediately after momentous events like the bombing of Pearl Harbor, but typically rebounds within six months.

A study by research firm included: the sinking of the U.S. battleship Maine on Feb. 15, 1898; the sinking of the passenger ship the Lusitania on May 7, 1915; the attack on the Pearl Harbor naval base on Dec. 7, 1941; the invasion of Kuwait by Iraq on Aug. 2, 1990; the bombing of the World Trade Center in New York on Feb. 26, 1993; and the bombing of federal offices in Oklahoma on April 19, 1995.

A day after the event, the Dow Jones industrial average was down an average of 1.9 percent, said. One week later, the Dow average had dropped by 3 percent. But then the average typically began to turn around. 

Two weeks after an attack or bombing, the index was down an average 2.1 percent, and within a month it was down just 1.6 percent. 

After six months, the Dow industrials were up an average 11.3 percent, and a year from the watershed event the benchmark had gained 18.4 percent. 

"In the near term, events like this cause near-term fear, panic, and economic disruption but that is when market bottoms are formed,'' Tim Ghriskey, head of Ghriskey Capital Partners, a money management firm for wealthy individuals, told Reuters on Sept. 12. "And usually a year later we have stronger and much higher financial markets as economic stability and investors return.'' 

At the two-year mark, the Dow industrials were up an average 30.7 percent; at three years up by 50.4 percent; and after five years up by 82.2 percent.

International Prospects Murkier

Of course, any relief could be short-lived should the situation go less smoothly or swiftly than in the Gulf War. 

"How it unfolds over the next few days will be key. If it looks as if things are not wrapped up quickly, then you start to get all sorts of scenarios,'' said Anthony Karydakis, senior financial economist at Banc One Capital Markets in Chicago. 

A popular uprising among Islamic fundamentalists in Pakistan or bomb attacks around the world would prove destabilizing to economies and markets, he said. 

Even if the strikes serve as a relief valve for the United States, they may heighten pressures abroad that tamp down their economic prospects. 

Britain joined the United States in the Sunday strikes but some European allies — many of which have large Arab-speaking populations — may worry that it will exacerbate social tensions. In addition, there could be real disruptions to normal commerce from disruptions to shipping and transport. 

"They don't have the kind of commitment (overseas) that we do about retaliating, not as much anyway. And they are more concerned about the impact of war and economic disruptions,'' Sohn said. "So I see...U.S. consumer confidence going up but economic conditions overseas may actually deteriorate somewhat because of this.'' 

Reuters and the Associated Press contributed to this report.