When it comes to removing Iraqi leader Saddam Hussein from power, President George W. Bush may still be searching for the right strategy, but many of Wall Street’s field generals are already redeploying their portfolios for the prospect of U.S. military action against Iraq.
With many U.S. allies publicly disapproving of a preemptive strike and key congressional Republicans advising caution and restraint, Bush’s plans for overthrowing the Iraqi leader by force are starting to look wobbly.
Indeed, on Wednesday the vacationing president tried to allay criticism over his stated plans to overthrow Saddam Hussein’s regime, insisting he has not yet decided to use military force and promising to consult allies and Congress before taking any action.
Even so, an informal survey of Wall Street strategists shows most are readying investment plans in preparation for a U.S. military strike against Iraq, which they say is quite likely, but probably still months away.
Dent in consumer confidence
An attack on Iraq would reverberate through the U.S. stock market and economy in several ways, strategists say.
In the short term, the shock of an attack on Iraq would dent consumer confidence, pushing stock prices lower and damaging consumer spending, which accounts for about two-thirds of U.S. economic activity.
The uncertainty surrounding any military action is certain to cast at least a temporary pall over the U.S. stock market, now regaining its footing after over two months of grinding declines triggered by a series of accounting scandals, dour corporate profits and worries about a weak economic recovery.
But there are some sectors of the market that are likely to see some benefit if armed action against Iraq is taken.
A large-scale military conflict is likely to prompt the U.S. government to increase its defense spending to replenish supplies, lifting the fortunes of companies in the defense sector.
And turmoil in the Middle East is sure to send oil prices surging, as investors worry about a disruption of oil supplies from the region, which in turn will boost the stock prices of oil-related companies. In a sign that some are betting on that outcome, oil prices hit a 15-month high of more than $30 a barrel this week.
Betting on the energy sector
A.C. Moore, investment strategist at Dunvegan Associates, said he is keeping a wary eye on the situation with Iraq and increasing his holdings in the energy sector.
“Seasonally, this is the right time to buy energy stocks, as you tend to buy them in the summer and sell them in the winter, so if there’s no Iraqi invasion it won’t be a harmful investment,” Moore added.
Alan Ackerman, chief market strategist at Fahnestock, is also recommending energy stocks, although he prefers to focus on companies with strong natural gas reserves.
In the defense sector he is buying shares of companies working on satellite communications, like Lockheed Martin.
“I’m trying to be selective,” Ackerman said. “These are two areas that I think have the prospect for growth down the road: Energy is certainly important to the U.S. economy, and the United States is looking to replenish its military reserves and boost its intelligence gathering operations post-Sept. 11.”
In the energy sector, Chip Hanlon, president of Unfunds, an investment consultancy, advises buying stocks in the oil-services sector, which includes names like Schlumberger and Baker Hughes.
“These stocks were annihilated along with the rest of the market in July, but they tend to move up when the price of oil rises so I have doing some nibbling here recently,” Hanlon said, adding that an attack on Iraq is likely to push up oil prices, boosting the sector.
“I’d sell these stocks into any rally in oil prices and buy on any dips in the equity market,” said Hanlon.
One way to play the sector is through an exchange-traded fund that tracks the oil-services sector, Hanlon said. One such fund, the Merrill Lynch Oil Service Holders Trust, which trades on the American Stock Exchange, is down sharply from a 52-week high of over $75 hit in early May making it an attractive buying opportunity, he added.
Retail shares seen vulnerable
Although he has yet to formulate a concrete strategy, William Barker, an investment strategy consultant at RBC Dain Rauscher, says he has been advising his clients to buy oil and defense stocks.
He’s also recommends dumping cyclical stocks, like retailers and auto makers. “The consumer tends to sit on his hands in this sort of situation, so I think we’ll see an impact on sectors related to consumer spending,” he said.
Barker points to the Gulf War conflict in 1990, when an allied coalition launched an attack against Iraq to liberate Kuwait. “Investors stayed at home and watched TV and the market didn’t really rally until it was certain that we would win.”
Others, like Hanlon, think an attack on Iraq is already factored into the market.
“The market came unglued when Iraq invaded Kuwait in 1990, but it bottomed and turned higher by the time Desert Shield turned into Desert Storm,” said Hanlon. “While there may be a few uncertain days for the market, I see a world without Saddam Hussein as bullish and I think the market would see it that way too.”