Bad news from Iraq is putting the U.S. stock market in a funk, overshadowing a growing economy and strong corporate profits in the minds of many investors.
The sharp pullback in stock prices Monday after a suicide bombing killed the head of Iraq’s Governing Council reflects how the war has become an increasingly influential wild card on Wall Street.
That growing sensitivity to Middle East turmoil puts more pressure on the Bush administration to maintain the economic recovery and restore confidence in the months leading up to the November election, market analysts say.
“The economy is being damaged already because of the high price of oil and the uncertainty in Iraq,” said Sung Won Sohn, chief economist at Wells Fargo Bank. “If we could somehow wipe away the Iraqi problem, the stock market would jump.”
On Monday, it fell sharply, with the Dow Jones industrial average plunging 105.96, or 1.1 percent, to 9,906.91, the lowest close for the bellwether index since Dec. 5. Earlier in the session, the index had fallen 150, but recovered somewhat as investors searched for bargains.
Broader stock indicators also fell. The Nasdaq composite index lost 27.61, or 1.4 percent, to 1,876.64, its lowest close since Oct. 24. The Standard & Poor’s 500 index was down 11.60, or 1.1 percent, at 1,084.10, its lowest close since Dec. 17.
Adding to Monday’s sell-off was a sharp fall on India’s main stock exchange after a leftist coalition government was elected there. But the bigger news was the suicide bombing in Iraq, where violence and uncertainty over the U.S. military involvement have helped push U.S. stocks down for weeks.
The decline in stock prices comes after a strong rally during much of 2003. Some analysts believe that the market was due for a correction and that it will resume marching up shortly, especially as investors finish adjusting their portfolios to the recent rise in interest rates.
While trouble in the Middle East affects short-term, day-to-day trading action, it has only a limited capacity to undermine stock market fundamentals, said Bernie Myszkowski at ABN AMRO Asset Management in Chicago. “I don’t think it’s the main thing,” he said.
But others see a decisive risk that justifies the stock market’s intense focus on events in Iraq.
Soaring oil prices and the potential for even more dramatic energy shocks are the most obvious source of peril, Sohn said.
As much as $10 of the nearly $42 price for a barrel of crude oil these days is based on uncertainty and fear, rather than supply and demand, he said. In the event of a crisis in the Middle East, the price could jump to $80 or even $100 a barrel, he said.
The Iraq war has made it more difficult for oil-producing allies such as Saudi Arabia to exercise a moderating influence, added Donald Straszheim of the independent research firm Straszheim Global Advisors Inc. “Our standing in the Middle East has been damaged quite badly,” he said. “The U.S. is more vulnerable to oil shocks.”
Energy prices rose again Monday. Crude oil and gasoline futures in New York shot up to their highest levels ever on concern that U.S. refineries may not be building up stockpiles of motor fuel fast enough to meet summer demand. Crude futures, which began trading in 1983, have jumped 43 percent from a year ago.
Pump prices have become a worry to Lee Scott, chief executive of retail giant Wal-Mart Stores Inc., who has estimated that the higher cost of gasoline is cutting $7 per week from the disposable income of his average customer.
Concern that energy prices will put a squeeze on consumer spending contributed to a broad decline in retail stocks Monday. Federated Department Stores Inc., owner of the Bloomingdale’s and Macy’s department stores, shed $1.49 to $44.85. Target Corp., the second-largest U.S. discount chain, fell 79 cents to $42.21.
Higher fuel costs weighed on airline stocks as well, with Continental Airlines, the fifth-largest U.S. carrier, dropping 47 cents to close at $9.30.
Besides the prospect of higher energy prices, the problems in Iraq have hurt investor confidence because they increase the likelihood of President Bush losing his re-election bid, said Brian Wesbury, chief economist at Chicago’s Griffin Kubik Stephens & Thompson. “The worse the situation in Iraq gets for President Bush, the more likely the election of John Kerry becomes,” he said.
The stock market would view that as a negative, Wesbury said, because it would jeopardize Bush’s program of tax cuts, which Wall Street favors.
Another worry is the increasing likelihood of additional acts of terrorism, said Paul Foster, market strategist at Mercury Trading in Chicago. “The investment community knows a terrorist act will affect earnings going forward,” he said. “We know it slows down the economy and it slows down corporate [financial results].”
Still, the worst-case scenarios of strategists such as Foster may never come to pass, and the overall health of the economy has continued improving despite setbacks in Iraq, said Straszheim.
“Companies are continuing to hire and invest and launch new projects and form new alliances largely independent of what’s going on in Iraq,” he said.
