War & the Economy

How Will Your Pocketbook and Portfolio Be Hit by the Iraqi Conflict?

Let These Lessons from the Past Be Your

Financial Guide

By Ken Segal

The prospect of an extended military conflict between the United States and Iraq affects Americans in many different ways: jobs, gas prices, proposed tax cuts all are vulnerable to impact right now.  When facing uncertainty about the economy, one sure defensive move is to increase your savings so that you will be prepared for whatever comes your way. But how will the war affect your long-term security—your retirement savings, which is most likely invested in the stock market in one form or another?

This is not the first time the world’s financial markets have been impacted by an international event, and it likely won’t be the last. But the stock market has a long history of successfully coping with the challenges and price volatility that often accompany an international crisis, such as a military intervention or a major natural disaster. During the week that the war began, the stock market rallied, posting its best week since it rebounded after the September 11, 2001 terrorist attacks. That’s an encouraging sign, but you can be sure that the market will react to events on a daily and weekly basis as the conflict continues. To better understand the ultimate impact of this war on your pocketbook and portfolio, it may be helpful to put recent events in some historical perspective.

Will History Repeat Itself?

During the Cuban Missile Crisis in October 1962, the Dow Jones industrial average dropped 9 percent over a span of several days. But within just six months, the Dow rebounded to post a 25 percent overall gain in value. Similarly, the Dow fell more than 4.6 percent the day after North Korea invaded South Korea in June 1950. The stock market index bounced back, however, to post an overall gain of more than 9.3 percent within just one year.

More recently, in August 1990, when Iraq invaded Kuwait (an act that ultimately led to the Gulf War), the Dow Jones industrial average lost almost 6 percent of its value over a six-month period. Yet, just a year after the initial invasion, the Dow Jones closed with nearly a 3.7 percent overall gain in value from the previous year’s numbers.

            There have been times, however, when the market has taken longer to rebound from a major international incident. In the wake of the 1941 attack on Pearl Harbor, for example, the Dow Jones industrial average dropped nearly 9.5 percent over a six-month period. As America entered a prolonged wartime period, the Dow did not regain its pre-war strength for almost two years.

            Although no one can predict how the market will perform in the weeks and months to come, the past may offer insight into the possibilities. However, you should not rely entirely on the past as an indicator of future investment performance.

Who’s Vulnerable?

             In terms of the stock market’s overall long-term trends, times of market instability and unease have nearly always been replaced by periods of stability and growth. Still, certain economic sectors may be affected more than others in times of military action. For example, oil companies might benefit if the supply of oil from the Middle East is constrained, resulting in higher crude oil prices. Companies in the travel, transportation and tourism economic sectors, on the other hand, may be negatively affected by a prolonged military involvement. As was the case during the Gulf War, consumers tend to limit vacation and travel plans when conflict breaks out and oil prices rise.

Is It Safe to Just Do Nothing?

            Although overseas events might tempt you to jump in or out of certain investments, make sure that your investment decisions are based on sound financial reasoning, not the latest newspaper headlines. While past performance is no guarantee of future results, investors who have stuck with their long-term investment strategies through turbulent times have often been rewarded for their perseverance. Consider the following tips for sticking with an established, well-rounded investment strategy during times of market volatility:

·        Don’t make investment decisions based on short-term market drops or gains. Even financial experts aren’t able to forecast market peaks and valleys accurately. Attempting to time the market by moving your money in and out of investments is a high-risk strategy that can result in missing out on strong markets by selling too early or buying too late.

·        Remain focused on your investment goals. Whether you’re investing for retirement or saving for the down payment on your dream home, it’s important to stay calm during times of market volatility and remember why you invested in the first place—to achieve your goals.

·        Stay diversified. Keep your investment dollars spread among multiple assets and asset classes, such as stocks, bonds and money-market instruments. Such a strategy can help moderate risk. If you’re not already diversified, now might be the time to spread your risk.

·        Look for buying opportunities. If international events result in a broad market decline, look for stocks that may be undervalued, allowing you to invest in companies with stock that is potentially “on sale.” Remember the classic market advice, “Buy low, sell high.

·        Turn to an experienced guide. For specific advice on how your overall financial portfolio might be affected by recent international events, consider consulting with a professional financial adviser.

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Ken Segal is an American Express Financial Advisor, based in Philadelphia, with 13 years’ experience in compensation and benefits analysis and financial planning. For further information, contact him via phone (215-940-0123) or e-mail: kenneth.m.segal@aexp.com.

American Express Financial Advisors Inc. Member NASD. American Express Company is separate from American Express Financial Advisors Inc. and is not a broker-dealer. This communication was published in March 2003 in the United States for residents of New Jersey and Pennsylvania only, and this advisor is licensed only in the states of New Jersey and Pennsylvania.

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