Despite some early jitters overseas, U.S. investors and consumers remained calm Monday after the nation embarked on a war–even as financial observers warned protracted combat could pose a hazard to the economy, especially if consumers lose confidence.
Sung Won Sohn, chief economist for Wells Fargo & Co., said a sharp, short fight would probably have little effect on the economy or financial markets.
“But if it is a quagmire and we are bogged down in a long war, history tells us that consumer confidence and the stock market suffer,” he said. “President Bush needs to show good progress with limited casualties.”
Although many Asian markets recorded notable drops Monday, and European indexes posted similar losses before recovering to end mostly flat, Wall Street remained relatively quiet in the wake of Sunday’s attack on targets in Afghanistan.
Both the Dow Jones industrial average and Nasdaq composite index quickly recovered from sharp opening losses, and showed little reaction to the launching of a second day of strikes. The tech-heavy Nasdaq index ended with a tiny gain, while the Dow and benchmark Standard & Poor’s 500 index both fell less than 1 percent.
The dollar was slightly weaker against major currencies, and crude oil futures ended little changed after an initial conflict-related jump overseas.
Among U.S. stocks, airlines, retailers and banks were among the hardest-hit sectors. Shares of several defense-related firms hit 52-week highs.
With Bush trying to ease fears of terrorist reprisals for the U.S. strikes, financial analysts said that consumer, investor and business confidence are key to propping up the economy and stock prices. In particular, consumer confidence is vital because spending by individuals accounts for about two-thirds of U.S. economic activity, and had played a sizable role in keeping the economy out of recession.
Shoppers out in force
Retail is a good, if anecdotal, barometer of consumer confidence.
Throngs of shoppers along North Michigan Avenue on Monday appeared undisturbed by the U.S. military action in Afghanistan. Enticed by pleasant weather, merchandise markdowns and the Columbus Day holiday, consumers crowded into popular shops, including Crate & Barrel, American Girl Place and Kenneth Cole.
Unlike the first few days after the Sept. 11 terrorist attacks, shoppers actually bought things.
“Business was very good today,” at Crate & Barrel’s Michigan Avenue store, said company spokeswoman Bette Kahn. “It’s just been very busy.”
Likewise, Nordstrom saw sales at its suburban stores spike Monday.
“Today looked pretty good,” said Bob Middlemas, Nordstrom’s executive vice president for the central states region. “Things are starting to look up a little bit. I’m certainly more optimistic than I was Sept. 11.”
The traffic at Nordstrom–which on Monday reported a nearly 10 percent drop in same-store sales companywide for September–was boosted by the wrap-up of an unprecedented 10-day sale that began in late September in an effort to get merchandise moving again. It was the first time the Seattle-based department store chain has held a major sale outside of its three regularly scheduled sales a year.
Several economists noted the uncertainty surrounding the slumping economy and possible reprisals could weigh on consumers, and any rebound in sales could vanish with new terrorist attacks on U.S. soil. But for now, retailers said most consumers are ready to get on with their lives, and that will soon include shopping for the holidays.
War, of course, poses economic risk to more than consumer confidence. War can spoil the value of money as inflation develops after months of conflict.
Governments typically borrow to pay for military action, driving up interest rates. As the military absorbs a greater share of the nation’s output, the price of goods and services can rise. Prolonged conflicts like World War II create labor shortages, which can push up wages. In short, life becomes more expensive.
Inflation risk downplayed
But, experts said, none of those scenarios appear likely today.
“There is always a risk of inflation, but it seems very low at this time,” said Robert Z. Aliber, professor of international economics and finance at the University of Chicago’s Graduate School of Business.
Because the economy already was slumping long before Sept. 11, production of manufactured goods far exceeded demand. That means, for example, that automakers can’t raise the price of the cars they sell.
Food prices have been stable for years and are not expected to rise much. Although leaders of some OPEC countries have raised the possibility of production cuts to bolster sagging prices, oil-producing nations have opted to maintain production for the time being.
“Inflation would occur only if consumers have little concern about risk and increase their spending,” Aliber said, adding that he doubts that will happen.
Combat with terrorists may be a war, but it is not like any the U.S. has fought recently. That is a wild card for the economy, Aliber said.
“It’s hard to figure out how this war ends,” he said. “Most wars end with a treaty–somebody admits defeat. But this war is unlikely to end that way.”
Some investors optimistic
Amid all the uncertainty, some traders and investors are optimistic. Although the stock market ended largely flat Monday, it hasn’t recovered all of its post-Sept. 11 losses, and, of course, remains far below its all-time highs.
For Paul Foster, a financial strategist at Beyondthebull.com, the drop in prices has made some stocks more attractive.
“I am optimistic, selectively optimistic,” he said, noting that he is reducing his cash position to buy more equities.
“The market looks six months forward,” Foster said. He said the muted reaction Monday means “the markets accept sporadic bombings, [special forces] attacks, things like that.”
Foster isn’t the only one looking for deals. On Monday, several companies announced mergers and acquisitions, including AT&T Wireless’ nearly $5 billion deal for the shares it didn’t already own of TeleCorp PCS Inc., a regional wireless service provider.
“Are you going to see other big companies–IBM or Dell or Microsoft–make these kind of creative acquisitions?” Foster asked. He said he believes they will.
