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Wall Street History
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03/14/2003
The Gulf War and the Market
[Wall Street History will return 3/28]
You have undoubtedly seen various articles over the past few
months on how the markets react to war. Of course each conflict
has its own characteristics and what sets the probable conflict in
Iraq apart from the rest is the plain fact that once Saddam is
ousted, there are a myriad of other problems that the U.S. will
still be faced with; North Korea, Iran, and terrorism in general, to
name a few geopolitical ones. I also feel that what I wrote back
on 6/15/01 and 6/22/01 concerning the first Gulf War presents the
best summary of that battle, combining both the political and
market aspects. I consolidated the two pieces, adding some new
material, and present it below. Additionally, you can find further
information on Saddam in my “Hott Spotts” link.
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After a 27% gain in 1989, the Dow Jones started 1990 at the
2753 level. On June 30 it had advanced to 2880. Then on July
13 it crossed the 3000 level for the first time, but didn’t close
above that mark. On July 16 the Dow finished at 2999.75 and on
the 17th, even with an intraday high of 3024, it still failed to end
the day at the magical 3000, again, eerily, closing at 2999.75. By
July 20, the Dow was at 2961 and then a week later 2898. As the
month wore on, Iraqi troop movements on the Kuwaiti border
may have been noticed by some in the intelligence community,
but the Bush Administration and the rest of the West seemed
unconcerned. Saddam is just posturing, our leaders thought.
Meanwhile, the price of oil, which had traded between $10 and
$18 a barrel for the period 1986 through early 1990, had been
ticking up as OPEC engineered a reduction in production, from
$16 to $20 by late July.
Then on August 2, Saddam Hussein made his move and within
hours Kuwait was taken. The Dow Jones had closed at the 2899
the day before and finished action on the 2nd at 2864, certainly
not a collapse, but sometimes the market is slow to react.
President Bush was vacationing in Maine at the time and
immediately denounced Iraq’s “naked aggression.” Iraqi and
Kuwaiti assets in the U.S. were frozen and trade was cut off. In
addition the UN issued a strong condemnation of its own. The
world was united, but Bush said the use of American military
force was not under consideration.
Saddam was shocked. He seems to have believed that he could
simply move into Kuwait and double the size of his oil reserves
at no cost. After all, if Israel could seize the Golan and West
Bank and withstand condemnation, he could act in a similar
fashion too. But then almost all of the Arab nations lined up
against him (the PLO and Jordan being the two prime
exceptions) with Saudi Arabia, Syria, and Egypt talking tough.
On August 3, the Dow Jones began to react and finished at 2809.
President Bush labeled the “integrity of Saudi Arabia” a vital
American interest and during a meeting with British Prime
Minister Margaret Thatcher in Colorado, Thatcher helped to
buck Bush up as she compared Saddam to Hitler. The “Iron
Lady” also convinced Bush that the U.S. had to act militarily and
send troops immediately to the Gulf.
On August 5, Bush said “This aggression will not stand.” Asked
how it would be undone he replied, “Just wait, watch, and
learn.”
The following day, Monday August 6, the Dow dropped over 90
points to finish at 2716. The UN authorized mandatory trade
sanctions and an embargo and Bush ordered the first forces of
Operation Desert Shield to Saudi Arabia under the command of
General Norman Schwarzkopf. No one knew what Saddam’s
next plan was but the emerging coalition couldn’t take the
chance that he would invade Saudi Arabia in an effort to control
40% of the world’s oil reserves.
As United States forces were joined by British and other
coalition troops in Saudi Arabia on August 7, the market
stabilized with the Dow closing that day at 2710. By August 9, it
was back up to 2758, before finishing the week on the 10th at
2716.
All this time Americans were being bombarded on the airwaves
by military “experts” proclaiming that Saddam Hussein had the
world’s fourth largest army and that his elite Republican
Guards were as good as anything the U.S. would be able to throw
at them. We began to hear of casualty figures ranging from
3,000-30,000 dead should the U.S. attempt to extract Saddam
from Kuwait. Economically, while we didn’t officially know it
at the time, the U.S. was entering a recession, due in no small
part to an increasingly uncomfortable feeling that the world was
spinning out of control. Oil certainly was, on its way to $40 by
October.
On August 22, President Bush mobilized the reserves and the
Dow Jones closed at 2560. The average ended the month at
2614.
Then in September, Bush met with the Soviet Union’s Mikhail
Gorbachev in Helsinki. Gorbachev offered his full support for
the coalition’s actions (though he provided no troops). It was
certainly another blow for Saddam as the Soviet Union had been
a major supporter and supplier to the Iraqi regime. Afterwards,
Bush issued the statement, “Out of these troubled times a new
world order can emerge a world where the strong respect the
rights of the weak.”
The massive troop buildup continued in the Gulf and the world
wondered how this would all end. The U.S. economy was
weakening rapidly and the Dow Jones closed at 2452 on
September 28, off 18% from its July 16-17 close.
By October, Operation Desert Shield was providing protection to
Saudi Arabia but Saddam was not responding to the economic
sanctions. The Dow Jones would close at 2365 on October 11,
off 21% from its peak or enough to be labeled a bear market.
That would also prove to be the market low until this very day.
Many have reached the conclusion that the rally which started on
10/11 was a result of the market “discounting” eventual U.S. and
UN success in the Gulf. But that would be far too simplistic.
The Dow hardly took off from the 2365 level. Two days after
the mid-term elections, November 8, President Bush announced
that he was doubling the force in Saudi Arabia “to build up an
adequate offensive military capability.” The Dow closed at
2443. Many in Congress objected, arguing that sanctions should
be allowed to work. But how long would we wait? A bit longer,
as it would turn out.
On November 29, the UN Security Council passed Resolution
678 giving Saddam until January 15, 1991 to withdraw from
Kuwait, after which UN members were to employ “all necessary
means” to liberate the country. In other words, war seemed
increasingly imminent. The vote was 12-0 (with Cuba and
Yemen abstaining). [The Dow closed at 2518.]
As commander-in-chief, President Bush could have acted alone
in authorizing military action against Iraq. He was afraid that if
he went to Congress for its formal support and didn’t receive it,
that would not only be a tremendous victory for Saddam, the
coalition would unravel. But by January 10, he was comfortable
that he had the votes so he authorized debate on a resolution for
the use of U.S. troops.
The two-day debate was one of the most contentious in
congressional history. Democratic Senator George Mitchell
expressed the sentiment of those opposed to military action.
“A grave decision for war is being made prematurely. There has
been no clear rationale, or convincing explanation for shifting
American policy from one of sanctions to one of war.”
The Dow Jones closed at 2501 on Friday, January 11. On the
12th, the House passed the resolution for the use of force by a
250-183 margin, with the Senate doing the same, 52-47.
At 6:00 PM (Washington time) on January 16 the first tomahawk
cruise missile from the deck of the USS Wisconsin was fired
against Iraq and the war was on. Wall Street had finished trading
on the 16th at the 2508 level. [You can see that the market
treaded water for months.] But during the course of January 17,
as it became clear that the initial operation was going well, the
Dow soared 4.5% to close at 2623. Then the market stalled,
finishing at 2603 on January 22 as Saddam was still showing no
signs of leaving Kuwait.
Meanwhile, Iraq retaliated against the coalition’s bombing runs
by launching scud missiles against Israel (and to a lesser extent
Saudi Arabia) in an attempt to provoke retaliation on the part of
the Israelis, a move that Saddam knew could undermine Arab
unity. But Israel exhibited remarkable restraint and, thankfully,
casualties were light from Hussein’s wayward missiles (save for
the tragedy of the U.S. barrack in Saudi Arabia). And for one
brief moment the Iraqi leader actually had the sense not to
launch chemical weapons, as he understood this would have led
to the annihilation of his nation.
While the damage from the bombing mounted, particularly on
Saddam’s vaunted Republican Guard, the Dow Jones was
moving smartly higher. On February 22, 1991 it closed at 2889.
That same day, President Bush gave Iraq a 24-hour ultimatum:
withdraw or face an invasion. Saddam responded by setting
massive fires in Kuwait’s oil fields. Two days later the 100-hour
ground war commenced and by February 28 Saddam had
accepted the terms of a cease-fire. President Bush addressed the
nation.
“Kuwait is liberated. Iraq’s army is defeated; our military
objectives are met.”
Market action was interesting during the days of the ground war.
February 24 was a Sunday.
2/22 – 2889
2/25 – 2887
2/26 – 2864
2/27 – 2889
2/28 – 2882
Then when the realization set in that it was truly over and that the
U.S. –led coalition had scored a resounding victory the market
rallied, closing at 2972 on March 5. [However, the Dow
wouldn’t spend a full month above the 3000 level until January
1992.]
Now it was time to deal with the economic recession, though
Americans wouldn’t know until later that the first quarter of
1991 would be the last one of negative growth. As for President
Bush, he would go on to squander his unbelievable 90% approval
rating in the wake of his success in the Gulf, losing the 1992
presidential election to Bill Clinton. Something about the
“vision thing.”
As for Margaret Thatcher, in light of the political pressure that
British Prime Minister Tony Blair is facing today, it’s interesting
to note that at the height of the military buildup she herself was
ousted in favor of John Major on November 28, 1990 due to her
own party tussle.
Source:
“American Heritage: The Presidents” Michael Beschloss
“The Century” Peter Jennings
“The Presidents” edited by Henry Graff
“America: A Narrative History” Tindall & Shi
“The Message of the Markets” Ron Insana
“The Twentieth Century” J.M. Roberts
“One World Divisible” David Reynolds
“We Interrupt this Broadcast” Joe Garner
“History of the Twentieth Century” Martin Gilbert
Wall Street History will return on March 28, at which time I will
launch a special series on the “Mississippi Scheme.”
Brian Trumbore
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