CNN/Money  
graphic
Markets & Stocks
graphic

Priced for perfection?
Some investors wonder if the recent war rally will end even before the war begins.
March 18, 2003: 6:12 PM EST
By Justin Lahart, CNN/Money Staff Writer

NEW YORK (CNN/Money) - Not too long ago traders the world over were girding themselves for war.

They sold shares across the board, dropping global stock markets to new lows for the year and, in some cases, levels not seen in years. They fled to the safety of bonds and gold. They dumped the dollar, they bid up oil.

“ We are priced for perfection regarding this geopolitical event. The market has taken a great leap of faith. ”
Bill Sullivan
Morgan Stanley economist

But last Wednesday, as war seemed increasingly inevitable, all these so-called war trades began to be reversed, the spark for a massive move higher in stocks. The news that President Bush would deliver an ultimatum to Iraqi President Saddam Hussein Monday evening only fueled more buying Monday.

All of which leads to an inevitable question: Will the rally be able to extend through the beginning of actual war?

"I was expecting to see a pop when war began," said John Vail, strategist at Mizuho Securities USA. "But that's got to be muted to some degree from what it would have been if we hadn't had this huge rally."

The change in attitude across markets in the past week has been massive. The Dow Jones industrial average has tacked on 8.9 percent, the S&P 500 is up 8.2 percent and the Nasdaq is up 10.2 percent. Light sweet crude has fallen from $36.73 to $30.05 a barrel, gold from $350.60 to $337.70 an ounce. The yield on the 10-year bond has gone from 3.58 percent to 3.91 percent. The greenback has had a snapback against the yen and euro.

"You don't get huge swings like this if you don't have huge amounts of capital being put to work," said Morgan Stanley economist Bill Sullivan.

"There's a huge conviction in the Wall Street community that this will be a successful, surgical, short-lived military incursion. That it will not cause any collateral damage to oil fields, that it will not destabilize Middle Eastern governments and that it will not lead to acts of terrorism in the United States."

It is not hard to imagine scenarios that don't fit that bill, Sullivan said, meaning that the war trades that lately have been unwound will be wound right back up again.

"The bar of expectations has been raised significantly," he said. "We are priced for perfection regarding this geopolitical event and there is no room for error. The market has taken a great leap of faith."

Should I stay or should I go?

Many traders are not so sure that the market can't run further, however.

"My feeling is that the market's trend is going to be sideways to higher with the possibility that if things go well in the first few days of the war, we could go substantially higher," said Bob Basel, Salomon Smith Barney director of listed trading.

 QUICK VOTE 
If the war in Iraq is quick and goes smoothly for the United States, stocks will go ...
  Sharply higher still
  Modestly higher
  Sideways
  Right back down

Institutional trading desks report that activity has remained muted even as overall market volume has risen -- a sign that big mutual fund and pension fund investors have not gotten into the market. Nor does it look like individual investors are involved, judging from continued mutual fund outflows.

That suggests the rally has been mostly driven by hedge funds, Wall Street trading desks and short-sellers who are covering positions. The implication is that the market could have some more juice.

To figure out if this dynamic is really in place, said Lowry Reports technical analyst Richard Dickson, it will be important to watch how the market acts in the first few days of war.

"If we trade sideways or have a small pullback, that would be a sign to me that some of the people who have been buying really are in it for the long term," he said. "In that case, I think we have a real rally on our hands and could head toward 9,000 on the Dow."

Still, stocks' move higher in anticipation of the quick resolution of a war that hasn't even happened yet strikes some observers as odd.

Watching war
graphic
The cost of war
War and Iraq: 5 portfolio dont's
Rethinking the Iraq reaction
Stocks in war and peace

Merrill Lynch chief equity strategist Rich Bernstein points out that the Fed, in its decision to hold interest rates steady Tuesday, abandoned its policy directive on where it thought the economy was headed, citing the "unusually large uncertainties clouding the geopolitical situation."

"If the Federal Reserve has no view of the future, how do all these investors have such a certain view?" he asked. "It's just another example of how speculative the market is."  Top of page




  More on MARKETS
Why it's time for investors to go on defense
Premarket: 7 things to know before the bell
Barnes & Noble stock soars 20% as it explores a sale
  TODAY'S TOP STORIES
7 things to know before the bell
SoftBank and Toyota want driverless cars to change the world
Aston Martin falls 5% in its London IPO




graphic graphic

Most stock quote data provided by BATS. Market indices are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer. Morningstar: © 2018 Morningstar, Inc. All Rights Reserved. Factset: FactSet Research Systems Inc. 2018. All rights reserved. Chicago Mercantile Association: Certain market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. Dow Jones: The Dow Jones branded indices are proprietary to and are calculated, distributed and marketed by DJI Opco, a subsidiary of S&P Dow Jones Indices LLC and have been licensed for use to S&P Opco, LLC and CNN. Standard & Poor's and S&P are registered trademarks of Standard & Poor's Financial Services LLC and Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC. All content of the Dow Jones branded indices © S&P Dow Jones Indices LLC 2018 and/or its affiliates.

Most stock quote data provided by BATS. Market indices are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer. Morningstar: © 2018 Morningstar, Inc. All Rights Reserved. Factset: FactSet Research Systems Inc. 2018. All rights reserved. Chicago Mercantile Association: Certain market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. Dow Jones: The Dow Jones branded indices are proprietary to and are calculated, distributed and marketed by DJI Opco, a subsidiary of S&P Dow Jones Indices LLC and have been licensed for use to S&P Opco, LLC and CNN. Standard & Poor's and S&P are registered trademarks of Standard & Poor's Financial Services LLC and Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC. All content of the Dow Jones branded indices © S&P Dow Jones Indices LLC 2018 and/or its affiliates.