Uncertainty about a possible war with Iraq has been a major headwind against the stock market -- and the U.S. economy. Recent developments, including statements by U.S. officials that Saddam Hussein is in "material breach" of the U.N. resolution on disarmament, suggest that a military conflict is looming in the new year. But the impact of a war on the stock market might not be so clear or easy to predict.
In the case of the World War II, the Korean War, and the 1990-91 Gulf War, the market performed relatively well. The Vietnam War stands out as a major exception. During that long and unsuccessful conflict, the market saw lackluster returns from 1964-75. That period also saw a major increase in government spending, associated with the war and President Lyndon Johnson's Great Society program. The S&P 500-stock index saw an average annual return of 0.6% over that time.
In contrast, the large-cap market benchmark netted a gain of over 6% during the Gulf War between the time Iraq invaded Kuwait (August, 1990) and Saddam's formal acceptance of a ceasefire in April, 1991.
The bottom line is the market acts better in relatively short, successful conflicts than in long and drawn-out campaigns where success and ultimate costs (like a protracted occupation) are more uncertain.
From MMS International staff analysts