|
|
 |
 |
Jordan Goodman is the author of Everyone's Money Book, available at 888-201-6300. This is the third edition of the book. You can also visit his Web site at www.moneyanswers.com. He talks with us on Thursday mornings.
|
|
April 3, 2003
"Investing in Wartime"
 Listen
Host: Insurance companies selling investment annuities linked to the stock market? Yep...Personal finance expert Jordan Goodman tells us more about it.
With all the wild ups and downs of the stock and bond market every day since
the war has started, I thought it might be helpful for people to get a bit
of perspective on what to expect from the markets for various major assets
during times of war.
The major determinant of how assets will be priced is the duration and
difficulty of the war. There is what I call the Grand See-Saw in the
markets, with the stock market on one side, and bonds, gold and oil prices on
the other side. When the war effort goes well, stocks soar and bonds, gold
and oil fall; when there is trouble with the war effort, the opposite
happens.
Here is a brief look at the outlook for these four assets over the longer
term:
Stocks: Usually, what happens in the stock market is that prices fall in
anticipation of the war, and rally after the war has started. For example,
when North Korea invaded South Korea in June, 1954, the Dow fell 9%, but a
year later was 11% higher. With the Tet offensive in January, 1968, in
Vietnam, the market fell 4% and was 10% higher a year later. When Iraq
invaded Kuwait in August, 1990, the Dow fell 9%, but was 10% higher a year
later after we kicked them out of Kuwait. It is likely that the same will
happen now as the uncertainty over going to war has hung heavy over the markets
for months, and that uncertainty was broken after the war started. When we
take over in Iraq, there will be a certain sense of celebration that could
lift stock prices. But then we will get back to focusing on the weak
economy, lower earnings, corporate and personal bankruptcies, and huge
federal and state budget deficits. So, the rally may not last too long.
Bonds: Bond prices have been rising whenever there are troubles in the war
because people are more fearful and buy bonds in a flight to safety. When
the war goes well and they are less fearful, they sell bonds and buy stocks.
When we win the war, bond prices might fall further, not only because people
are putting money into stocks, but also because of fear of the huge federal
budget deficits that are going to result from the war. The initial war cost
is $75 billion, but it is clearly going to be many billions more, meaning
the government is going to flood the market with more new bonds in coming
months, putting upward pressure on interest rates.
Gold: Gold soared up to nearly $390 an ounce when fears of the war were
highest, and have since dropped back to about $330 an ounce. If the war is
won relatively soon, gold should drop further because people will be less
fearful. If there are other terrorist incidents, however, gold could spike
up quickly.
Oil: Oil prices also soared to nearly $40 a barrel leading up to the war, on
fears that Iraq would attack Saudi tankers or disrupt oil supplies. But as
we have been taking control of Iraqi oil fields and putting out oil well
fires, the oil market has calmed down and prices have fallen to about $30 a
barrel. When we win the war, oil prices should fall even further to the low-to-mid-20s once the Iraqi oil starts flowing again.
Whatever you do as an investor, take a longer-term view. It is easy to be
swayed emotionally up and down by the market’s volatility, but you have to
make decisions that work best for your portfolio over the long run, based on
your goals and ability to handle risk.
For More Financial Tips From Jordan Goodman
|
|
