IF THE UNITED STATES goes to war with Iraq, what will that mean for the stock market and investors' portfolios?
The answer depends largely on whether the war would be a quick, decisive victory for the United States or prolonged and costly in terms of dollars and American casualties, experts say.
What's evident, though, is that the prospect of war, on top of troubles already besetting stocks, has taken its toll on the market and added to volatility.
"We have had a lot of shocks to begin with in the last year or so, and the economy is wobbly," said Sung Won Sohn, chief economist with Wells Fargo & Co. in Minneapolis. "Simply the possibility of war has increased the uncertainty. The market can deal with bad news, but not with uncertainty."
Some predict that if the United States goes to war, the uncertainty will disappear and the market will rebound.
"We are expecting a huge, huge rally as soon as any bombs drop, just like the gulf war over a decade ago," said Louis Navellier, chief investment officer of Navellier & Associates in Reno, Nev. "What happens is when you are rattling your sabers threatening war, the market gets nervous because of the uncertainty. But when the bombs drop, it goes absolutely nuts."
During the Persian Gulf war, stocks fell in the months after Iraq's invasion of Kuwait in August 1990. In mid-January, on the first day of trading after the U.S. air campaign against Iraq began, the Dow jumped 4.6 percent.
"Generally, wars, especially when we are successful in the war, have been very good for the markets," said Roger Ibbotson, chairman of the financial research firm Ibbotson Associates in Chicago. Even when the United States was fighting in Afghanistan late last year, stocks rebounded, he said.
The average annual total return of the S&P 500 Index was 20.3 percent during World War II, 16.2 percent during the Korean War, 7.6 percent during the Vietnam War and 15.8 percent during the gulf war, according to Ibbotson Associates
Though some experts predict that the effect on the market would be a replay of the gulf war experience, others say it might be different this time.
During the gulf war, "we just wanted to drive Iraq out of Kuwait and restore the status quo. Now we want to remove Saddam Hussein, and that's quite a different prospect," said Jeff Tjornehoj, a research analyst with Lipper Inc.'s Denver office.
"He would be a cornered dictator with little to lose, and there is a real risk," said Gary Gensler, a former U.S. Treasury undersecretary who lives in Baltimore.
Another possibility is that a war could spur terrorist attacks on U.S. soil, which would send stocks spiraling downward, experts said.
"There has never been so many unknowns," said Bill Lauer, chief investment officer of Chevy Chase Trust in Bethesda. "Certainly, the fear is: Where is the war waged? If it's waged overseas, there's a lot less damage to consumer confidence than if it's waged here."
Also, crude oil prices, which began the year at less than $20 a barrel, have climbed to about $30 as talk of war accelerates. Oil prices are expected to soar at the onset of a war and could quickly fall if it appeared that supplies wouldn't be disrupted.
If prices didn't retreat, consumers would pay more for fuel and have less to spend elsewhere and keep the economy going, experts said.
"If we go to war, given the current wobbly economic situation, the probability of a double-dip [recession] goes up significantly," Sohn said.
War might still be averted by diplomacy, and that, too, would send stocks soaring, experts said. But if that doesn't happen and war comes, here's how it could affect certain stocks:
Defense stocks have been rising because of increased government spending, and that would continue during a war, experts said.
"It seems clear that in the next five to 10 years, there will be more spending on defense," even without a war, said Peter Ricchiuti, a professor of finance at Tulane University in New Orleans. " It's a more dangerous world than we thought."
Oil stocks, particularly shares of oil producers, are also likely to get a boost at the beginning of a war as investors seek safety, said Kate Warne, senior energy analyst with Edward Jones in St. Louis.
"In general, people tend to buy them in times of world uncertainty," she said. "They will see it as a way to hedge against the [prospect] that oil prices will move a lot higher and stay a lot higher long-term."
Shares of health care and consumer staples companies probably would hold up well during a war, as they have in other times of uncertainty, said Lauer. "No matter what happens, people will have to still brush their teeth and go to the grocery," Lauer said.