THREAT OF WAR WITH IRAQ LEAVES THE STREET.CALM: UNLIKE LAST TIME, INVESTORS TAKING GULF CRISIS IN STRIDE

If investors are fretting about the chances of a war between the United States and Iraq, there’s little sign of it on Wall Street.

As Congress debated how extensive a U.S. attack on Iraq should be last Tuesday, the Dow Jones Industrial Average soared to 8,295.61 — its first record high in six months. Analysts say the latest rise was fueled in part by investors’ belief, for now, that a war with Iraq would not trigger a recession, as it did in 1990 when the Dow plunged 21% in the months following Iraq’s invasion of Kuwait and its oil fields.

“Iraq is not perceived as that big of a threat this time around,” says John Van Belle, a portfolio manager in Short Hills, N.J., with more than $1 billion in assets under his authority at Prudential Investments. “Plus, it’s not new anymore. We’ve all been through this before.”

Agreeing is Michael Hirsch, president of the Boston-based M.D. Hirsch division of Freedom Capital Management, who adds that investors are feeling particularly invincible these days — especially now that decent fourth-quarter earning results have persuaded many that the crisis in Asia is largely over.

“The attitude is “Look, we went through this cataclysm in the Far East and the market came back to set a new record,’” says Mr. Hirsch, who oversees $225 million in assets.

But investors may be fooling themselves. While a military strike against Iraq isn’t likely to tank the economy initially, it may be enough to knock investors off their perch. A protracted battle, especially one that draws in other nations, could send money barreling out of stocks and into such safe havens as gold and Treasury bills.

A blow-up in Iraq could cause other problems. Oil prices were at four-year lows of $16 a barrel in January, then talk of bombing sent them to $17. Today, they have settled in at $16.15.

The worst possible scenario: Saddam Hussein responds to a U.S. bombs by launching an attack on Persian Gulf oil producers, sending oil prices past $25 a barrel and putt
ing the brakes on the world economy.

“It could be just the kind of catalyst that would put us in a recessionary environment,” says Stephen T. Gorman of Norwell, Mass., a certified financial planner supervising more than $50 million.

Like most financial planners and advisers, Mr. Gorman senses little concern among clients about war with Iraq. One client, he says, recently even bought more Texaco stock, hoping that an attack would boost oil prices.

If the U.S. does decide to drop bombs on Iraq, investors can be confident that the domestic economy is much better positioned to withstand such a threat.

The U.S. consumer price index rose a measly 1.7% last year, compared to 6.1% in 1990. The nation’s unemployment rate stands at 4.7%, down from 5.6% eight years ago. A 30-year fixed-rate mortgage carries 7.03% interest today, compared to 10.8% in 1990. And the yield on the benchmark 30-year T-bond is 5.75%, vs. 8.5%.

Add to that a balanced federal budget, strong fourth-quarter earnings — with nearly 70% of U.S. companies reporting earnings that equaled or beat Wall Street estimates — and forecasts by some analysts that the Dow will top 9,000 this year.

“You can’t even begin to compare today’s economy with the economy back in the 1990s,” says Nicholas S. Perna, chief economist for Fleet Financial Group. “The economy was already beginning to falter prior to Saddam Hussein’s invasion of Kuwait and that’s certainly not the case now.”

Lots of room to wiggle

Mr. Perna says today’s economy offers more wiggle room than in 1990. “There’s plenty of room now for the Federal Reserve to play with interest rates,” he says. “There’s even room for Congress to lower taxes.”

Then again, today’s stock prices are floating at historically lofty levels, with a price-earnings ratio of 22.2 for the Standard & Poor’s 500 stock index late last week, vs. 16.6 in 1990. And the Dow is four times higher than it was then.

There seems to have been a dramatic change in investor psy
chology since the Persian Gulf War. Having weathered a couple of steep stock market declines, the Asian crisis and recent attacks on the Clinton presidency, investors are starting to view the market as unsinkable.

Nowhere is the change more apparent than in last week’s equity runup.

“People seem to think nothing can affect this market,” says Kevin Parke, director of research at Boston-based MFS Investment Management. “That wasn’t the case before.”

out beating bushes

While it remains to be seen whether investor confidence is borne out, it’s not surprising that some portfolio managers are beating the bushes everywhere for investment opportunities in the today’s climate of political unrest.

Take Bernard J. Horn, who overseas $50 million as president of global stock money manager Polaris Capital Management in Boston. Mr. Horn says he’s keeping a close eye on several Israeli companies. Conflict between the U.S. and Iraq, he says, would inevitably push their stock price downward.

“There are some very well managed companies in Israel,” he says. “Things are priced a little high right now, but that would change if something happens between the U.S. and Iraq.”