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By Adam Shell, USA TODAY
There is growing concern on Wall Street that deadly military clashes
with Iraqi insurgents, images of U.S. soldiers in body bags and a potential
political backlash against President Bush (news - web sites) could hurt
investor confidence.
Previously, news about the economy and first-quarter corporate profits
oftentimes overshadowed the situation in Iraq (news - web sites). Now,
investors seem to be sharpening their focus on the potential negatives
a protracted fight in Iraq will have on stocks.
"Iraq could very well become a bigger issue than the economy,"
says Jeremy Siegel, finance professor at the University of Pennsylvania's
Wharton School. Citing uncertainties resulting from grim headlines from
the war front, including disturbing images of dead Marines in body bags
on the front pages of major U.S. newspapers, investors were in no mood
to buy stocks.
The Dow Jones industrial average, which had rallied more than 500 points
in the previous two weeks, slid almost 91 points, or 0.9%, to close
Wednesday at 10,480. The Dow is up 0.3% in 2004. Some experts also attributed
the dip to a disappointing profit report from aluminum maker Alcoa and
profit warnings from cell phone maker Nokia (news - web sites) and disk
drive maker Seagate Technology.
Iraq is not yet acting as a heavy weight on stocks as it did in the
months leading up to the invasion of Baghdad last spring. Christopher
Wolfe, senior market strategist at J.P. Morgan Private Bank, says Wednesday's
weakness was due to investor cautiousness in the face of the weak earnings
reports. Overall, Wall Street has high expectations for first-quarter
profit, expecting growth of 17% vs. a year ago.
Still, continued chaos in Iraq could divert investors' attention from
the improving economy and keep jittery investors on the sidelines, notes
Donald Straszheim, president of Straszheim Global Advisors. Bearish
implications of ongoing strife include:
•Less risk-taking. "People will be more cautious and less
inclined to buy stocks," Straszheim says.
•Political fallout. "It hurts the credibility of the Bush
administration and increases the possibility that Bush might lose,"
says Byron Wien, senior investment strategist at Morgan Stanley. "A
Democratic victory would be interpreted as a negative" for the
stock market. Investors fear that if Democratic front-runner John Kerry
(news - web sites) wins the White House, he will roll back tax cuts,
including those on stock dividends and capital gains.
•Reminders of past failures. "The central concern of investors
is whether Iraq will prove to be another Vietnam," says Stuart
Schweitzer, global investment strategist at J.P. Morgan Fleming Asset
Management.
•A potential oil crisis. If oil shoots above $40 a barrel, the
economy could suffer. Wednesday, light sweet crude gained $1.18 to close
at $36.15 a barrel.
A sign of how geopolitics are again affecting Wall Street: Cable business
news network CNBC had two former U.S. generals as guests Wednesday.
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