The Gulf War and the Market
Brian Trumbore
President/Editor, StocksandNews.com

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.

---

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