War Jitters: 1941

Most analysts are convinced that the bear market of 2002 is the result of accounting and fraud scandals affecting corporate America. In other words, it is a domestic problem.

However, unless the Dow Jones Industrial Average rallies spectacularly in the second half, it is likely to end 2002 in the red — for the third year in a row.

The last time that happened, incidentally, was in the truly terrible year of 1941. In fact, during the three-year period from 1939 to 1941 the Dow lost 26%.

Between the start of 2000 through July 2002, the market's fall has been steeper, measuring around one-third.

Of course, 1939 was not a very good year. That was when Germany invaded Poland — and the world was plunged into World War II. Less than a year later Hitler's troops marched into Paris.

However, it was not until December 1941, when the Japanese bombed Pearl Harbor, that the United States entered into the global military conflict. The isolationist strain was very strong on U.S. public opinion, casting doubt that the United States would ever become involved in actual fighting.

But back then, the stock market turned around because U.S. companies could be expected to benefit from the war.

Starting in 1942, the Dow had a long winning spell, lasting until the end of the war. At its next peak in 1946, the index had nearly doubled compared to the end of 1941, and stood almost 40% above its end-1938 levels.

It is unlikely that in 2000 the U.S. stock market was discounting the risk of war. The United States was still basking in the security and glory of its Cold War victory.

Yet, since the election of George W. Bush as U.S. President in late 2000, stock investors have had to consider putting a premium on the risk of military confrontation.

Even before September 11, analysts speculated whether Mr. Bush would finish the unfinished business he had inherited from his father — and topple Iraqi leader Saddam Hussein.

A regime change in Iraq—most likely by means of a U.S. military action — is viewed as a near-certainty by political Washington following the terrorist attacks on the World Trade Center and the Pentagon.

And, wouldn't you know it, stocks started to nosedive just as talk of getting Saddam intensified in Washington, with the Bush Administration reportedly drawing up several sets of plans for attacking Iraq.

Keeping the 1939-1941 parallel in mind, one can only hope that it is a mere coincidence.