Wednesday, February 05, 2003

Gulf war and the stock markets

When Iraq invaded Kuwait, the markets were shattered - and I mean the stock markets. The reason was that it was an unexpected move by Iraq and it took most market players by surprise. In the days that followed the nervousness, the uncertainty and the concerns on the economic impact literally forced the market makers to squeeze out any juice left in the stock markets. But cruelly and ironically - wars are good; at least for the stock markets and for all the investors. Ok not all the investors but investors who know exactly when to get in.

During the first few days after Saddam took over Kuwait, there was no knee jerk reaction from the markets. That was reasonably expected because no one knew what the world's reaction was going to be (Bush had denounced the Kuwaiti takeover but he had also said that America would NOT get involved militarily). But it was the UK that convinced America to act on this grave matter in the interests of their Saudi friends - who felt intimidated by Saddam's neighbourly presence. The next week Dow Jones (DJI) fell by 5.2% by 2864 to 2716.

In the weeks that followed the DJI would collapse (between occasional hiccups) by almost 1.5% a week. And by Oct 11, the Dow had reached 2365 - a staggering 17.5% drop from the August 1 levels. To this day the DJI has not gone below this point. The markets stabilised around the 2400 levels because most analysts had taken the economic impact into the share prices and knew what was going to happen. The only uncertainty was whether America would win easily or would it be a dragged out war like Vietnam.

What followed was a steady rise in the index. As more and more countries condemned Saddam and backed US, the index gained a few percentage points on a regular basis. And when the war finally began the markets had literally recovered to the levels before the Saddam's invasion of Kuwait. What pleased the markets was that it was a "100 hour war". Though the war was officially declared over on Feb 28th (the day Saddam accepted the terms of ceasefire), the true momentum of the markets were felt up to March 5th when the Dow reached the 3000 barrier - a 27% increase from the lows it had seen in mid-October.

Will it be the same this time? Can crafty investors make a killing this time round as well? I shall write about it in another post.


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