As we pick up our story on the invasion of Kuwait in 1990 and it's impact on the U.S. stock market, it's late July and Saddam has begun massing his troops on the Iraq / Kuwait border. The Dow Jones had peaked on July 16 and 17 at 2999.75, passing 3000 intraday, but failing to hold that level.

Meanwhile, the price of oil, which had traded between $10 and $18 a barrel for the period 1986 through early 1990, had been witnessing a price spike by late July from the $16 level as OPEC engineered a reduction in production. Oil rose to $20.

Then on August 2nd, Saddam Hussein made his move and within hours Kuwait was taken. The Dow Jones had closed at the 2899 level on August 1st and finished action on the 2nd at 2864, certainly not a total 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 against Saddam, but Bush said the use of American military force was not under consideration.

Saddam Hussein 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 too. But then almost all of the Arab nations lined up against him (the PLO and Jordan being two of the exceptions) with Saudi Arabia, Syria, and Egypt all joining in the tough talk.

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 media 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 he didn't receive it, that would be a tremendous victory for Saddam and 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 operations were 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 which Saddam knew could undermine Arab unity. But Israel exhibited remarkable restraint and thankfully casualties were light from Hussein's wayward missiles. 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. The Gulf War was over.

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 5th. [However, the Dow wouldn't spend a whole month above the 3000 level until January 1992.]

Now it was time to deal with the economic recession, though Americans didn't know that the first quarter of 1991 would be the last one of negative growth. And President Bush would go on to squander his unbelievable 90% approval rating, in the wake of his success in the Gulf, to lose the 1992 presidential election to Bill Clinton. Something about the "vision thing."

Sources:

"American Heritage: The Presidents," Michael Beschloss
"The Century," Peter Jennings
"The Presidents," 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
[*Portions of the preceding were also included in a 12/23/99
piece I did for "Hott Spotts."]

Brian Trumbore