SIMILARITIES TO THE LAST WAR WITH IRAQ
John J. Murphy
COMPARISONS WITH 1990... Everyone is aware that the last few weeks have seen rising gold and oil prices, a weak dollar, rising bonds, and weaker stocks. Much of that is tied to economic trends. However, we have to also consider the possibility that some of these trends are being influenced by prospects for a war with Iraq (possibly early next year). That being the case, we feel it our responbility to point out some similarities between market trends of recent months -- and those that took place in the months leading up to the last Iraq war. Chart 1 shows oil prices rising this year. The same thing happened in 1990 -- at least for awhile.


Chart 1

SIX MONTHS LEADING UP TO LAST WAR... Iraq invaded Kuwait in August 1990. In the ensuing six months leading up to the actual outbreak of war, the markets followed some predictable trends -- not unlike this year. Gold and oil prices rose, the dollar fell; bond prices rose while stocks fell. After the war started in January 1991, virtually all of those "war-related" trends were reversed. Chart 2 shows oil spiking up during August 1990 -- before peaking near $40 during October. Another brief upward spike occurred during January 1991. At the outbreak of war that month, however, oil prices weakened. During the same six month period, gold rallied $60 -- before peaking at the outbreak of war. The simultaneous dollar decline bottomed early in 1991. Charts 5 and 6 show bond prices rising -- and stock prices falling -- into the new year. Both trends then reversed in the new year. Stock prices rose -- while bond prices flattened.


Chart 2


Chart 3


Chart 4


Chart 5

NOT THE SAME -- BUT SIMILAR... No two time periods are exactly alike. That's why we don't want to carry this comparison too far. However, there are enough similarities between this year and 1990 to take some notice. It also seems logical to assume that the potential for war has contributed in some fashion to the size of recent trends. That's doesn't mean that all existing trends will be reversed as they were in early 1991 after the Persian Gulfwar started. However, any decisive resolution of the Iraq situation could cause at least some retracement of recent trends.


December 23, 2002

John J. Murphy, CNBC-TV's technical analyst for many years, and Greg Morris offer money managment and market services at MURPHYMORRIS.COM , email address orders@murphymorris.com.