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Tech stocks brace for war
The technology industry has often fared well during wartime. So why are tech execs nervous now?
March 4, 2003: 12:04 PM EST
By Eric Hellweg, CNN/Money Contributing Columnist

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SAN FRANCISCO (CNN/Money) - Reading daily descriptions of market activity during the past month, you might easily conclude that Wall Street has gone peacenik. No, traders haven't swapped their pinstripes for tie-dyes. But at the close of the trading day, you're likely to hear a variation on one of these observations:

1. "The market closed up today on news that Iraq is cooperating with inspectors."

2. "The market dropped today on news that the United States is edging closer to war."

Given the historically positive performance of the overall market and the technology sector during times of war, why is the prospect of conflict in Iraq being used to explain negative market performance? And regardless of political leanings, does anyone in the United States -- let alone intelligent, well-informed Wall Street watchers -- really think that war can be avoided?

"People on Wall Street don't think," George Friedman says, laughing. The chairman of Austin-based firm Strategic Forecasting and author of "The Future of War," Friedman explains that "Wall Street follows sentiment, and sentiment is a contrarian indicator."

Still, everywhere you look, tech executives are talking about the war and the negative effect it is having on their business. Last week, eBay's (EBAY: Research, Estimates) Meg Whitman told attendees at a Goldman Sachs (GS: Research, Estimates) conference that "war in Iraq is a potential issue for us. Many eBay users will go from the Net to CNN," shunning shopping to keep up with the news.

That may be true for the online trade in Pez dispensers. But is the gloomy prognosis warranted for the tech sector as a whole? In the past, after all, there has been a lucrative (if rather unsettling) relationship between military conflict and growth in technology earnings.

The Civil War sparked one of the greatest booms ever when investors realized that the military would spend vast amounts to purchase munitions and other supplies. World War II lifted the country out of the Depression for much the same reason. As advanced technology began to play a more central role in military strategy, technology companies saw additional gains during conflicts.

Friedman points to Oracle (ORCL: Research, Estimates), a firm created to meet the Navy's database needs, and Microsoft (MSFT: Research, Estimates), which took off only after the Air Force selected MS-DOS as its preferred computer operating system. "Wars are almost invariably stimulative," Friedman says. "Economies and markets surge during times of war."

Given the positive correlation between war and tech spending, are today's executives simply scapegoating war jitters instead of acknowledging structural factors that may explain their ongoing woes?

With or without war, capital spending remains down, negatively impacting company earnings. "The scapegoat factor is real," says IDC analyst Roger Kay. "Companies can point to war jitters and probably get away with it. In this patriotic world, no one will turn around and say they're wrong."

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Kay believes that technology will again benefit from the outbreak of hostilities. "If you look at spending allocations, the federal government is one of the few that are rising," he says. "They're buying information technology."

And even though tech execs have been fretting about the potential impact of a war on their companies' performance, the technology sector has actually seen some gains in recent months. According to Thomson Financial/First Call, S&P 500 profits for the first quarter are expected to climb 7 percent, compared with 14 percent for tech.

Investors have to ask themselves how much higher tech stocks might go when the war starts. "From a financial standpoint, we're already at war," says Rob Enderle, an analyst at Giga Information Research. "Much of the impact is already felt."


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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.