War with Iraq Will Cause Drop in Stock Market, Increase Market Place Uncertainty

An American attack on Iraq will likely cause a drop in the stock market, a decline that will continue as long as the war goes on or if there is an increase in terrorist attacks on the United States, a University of Alabama finance professor predicts.

“If we have war with Iraq, my opinion is that the market will initially go down slightly, as it did in the Gulf War, and then stay down until the conflict is resolved,” says Dr. Robert McLeod, professor of finance at UA’s Culverhouse College of Commerce and Business Administration and an authority on financial institutions and markets.

“The longer the conflict, or if there is an increase in terrorist attacks in the U.S., the greater the effects on the economy due to the psychological impact on investors and consumers. Anytime uncertainty is increased in the market place and the economy, stocks usually go down and consumers spend less,” McLeod says.

In addition, the United States would have to pay most of the cost and bear the brunt of any oil price shock or other market disruptions, government officials, diplomats and economists say. Eleven years ago, the Persian Gulf War, fought to roll back Iraq’s invasion of Kuwait, cost the United States and its allies $60 billion and helped set off an economic recession caused in part by a spike in oil prices.

If consumer and investor confidence remains fragile, military action could have substantial psychological effects on the financial markets, retail spending, business investment, travel and other key elements of the economy, McLeod says.