As we pick up our story on the invasion of Kuwait in 1990 and
its impact on the U.S. stock market, it”s late July and Saddam
has begun massing his troops on the Iraq / Kuwait border. The
Dow Jones had peaked on July 16 and 17 at 2999.75, passing
3000 intraday, but failing to hold that level.
Meanwhile, the price of oil, which had traded between $10 and
$18 a barrel for the period 1986 through early 1990, had been
witnessing a price spike by late July from the $16 level as OPEC
engineered a reduction in production. Oil rose to $20.
Then on August 2nd, Saddam Hussein made his move and within
hours Kuwait was taken. The Dow Jones had closed at the 2899
level on August 1st and finished action on the 2nd at 2864,
certainly not a total collapse.but sometimes the market is slow
to react.
President Bush was vacationing in Maine at the time and
immediately denounced Iraq”s “naked aggression.” Iraqi and
Kuwaiti assets in the U.S. were frozen and trade was cut off. In
addition the UN issued a strong condemnation of its own. The
world was united against Saddam, but Bush said the use of
American military force was not under consideration.
Saddam Hussein was shocked. He seems to have believed that
he could simply move into Kuwait and double the size of his oil
reserves at no cost. After all, if Israel could seize the Golan and
West Bank and withstand condemnation, he could too. But then
almost all of the Arab nations lined up against him (the PLO and
Jordan being two of the exceptions) with Saudi Arabia, Syria, and
Egypt all joining in the tough talk.
On August 3 the Dow Jones began to react and finished at 2809.
President Bush labeled the “integrity of Saudi Arabia” a vital
American interest and during a meeting with British Prime
Minister Margaret Thatcher in Colorado, Thatcher helped to
buck Bush up as she compared Saddam to Hitler. The “Iron
Lady” also convinced Bush that the U.S. had to act militarily and
send troops immediately to the Gulf.
On August 5, Bush said, “This aggression will not stand.” Asked
how it would be undone, he replied, “Just wait, watch, and
learn.”
The following day, Monday August 6, the Dow dropped over 90
points to finish at 2716. The UN authorized mandatory trade
sanctions and an embargo and Bush ordered the first forces of
Operation Desert Shield to Saudi Arabia under the command of
General Norman Schwarzkopf. No one knew what Saddam”s
next plan was but the emerging coalition couldn”t take the
chance that he would invade Saudi Arabia in an effort to control
40% of the world”s oil reserves.
As United States forces were joined by British and other
coalition troops in Saudi Arabia on August 7, the market
stabilized with the Dow closing that day at 2710. By August 9 it
was back up to 2758 before finishing the week on the 10th at
2716.
All this time, Americans were being bombarded on the media
airwaves by military “experts” proclaiming that Saddam Hussein
had the world”s fourth largest army and that his elite Republican
Guards were as good as anything the U.S. would be able to throw
at them. We began to hear of casualty figures ranging from
3,000-30,000 dead should the U.S. attempt to extract Saddam
from Kuwait. Economically, while we didn”t officially know it
at the time, the U.S. was entering a recession, due in no small
part to an increasingly uncomfortable feeling that the world was
spinning out of control. Oil certainly was, on its way to $40 by
October.
On August 22 President Bush mobilized the reserves and the
Dow Jones closed at 2560. The average ended the month at
2614.
Then in September, Bush met with the Soviet Union”s Mikhail
Gorbachev in Helsinki. Gorbachev offered his full support for
the coalition”s actions (though he provided no troops). It was
certainly another blow for Saddam as the Soviet Union had been
a major supporter and supplier to the Iraqi regime. Afterwards,
Bush issued the statement, “Out of these troubled times.a new
world order can emerge.a world where the strong respect the
rights of the weak.”
The massive troop buildup continued in the Gulf and the world
wondered how this would all end. The U.S. economy was
weakening rapidly and the Dow Jones closed at 2452 on
September 28, off 18% from its July 16-17 close.
By October, Operation Desert Shield was providing protection to
Saudi Arabia but Saddam was not responding to the economic
sanctions. The Dow Jones would close at 2365 on October 11,
off 21% from its peak or enough to be labeled a bear market.
That would also prove to be the market low until this very day.
Many have reached the conclusion that the rally which started on
10/11 was a result of the market “discounting” eventual U.S. and
UN success in the Gulf. But that would be far too simplistic.
The Dow hardly took off from the 2365 level. Two days after
the mid-term elections, November 8, President Bush announced
that he was doubling the force in Saudi Arabia “to build up an
adequate offensive military capability.” The Dow closed at
2443. Many in Congress objected, arguing that sanctions should
be allowed to work. But how long would we wait? A bit longer,
as it would turn out.
On November 29 the UN Security Council passed Resolution
678 giving Saddam until January 15, 1991 to withdraw from
Kuwait, after which UN members were to employ “all necessary
means” to liberate the country. In other words, war seemed
increasingly imminent. The vote was 12-0 (with Cuba and
Yemen abstaining). [The Dow closed at 2518]
As commander in chief, President Bush could have acted alone
in authorizing military action against Iraq. He was afraid that if
he went to Congress for its formal support and he didn”t receive
it, that would be a tremendous victory for Saddam and the
coalition would unravel. But by January 10 he was comfortable
that he had the votes so he authorized debate on a resolution for
the use of U.S. troops.
The two-day debate was one of the most contentious in
congressional history. Democratic Senator George Mitchell
expressed the sentiment of those opposed to military action.
“A grave decision for war is being made prematurely. There has
been no clear rationale, or convincing explanation for shifting
American policy from one of sanctions to one of war.”
The Dow Jones closed at 2501 on Friday, January 11. On the
12th, the House passed the resolution for the use of force by a
250-183 margin, with the Senate doing the same, 52-47.
At 6:00 PM Washington time on January 16 the first tomahawk
cruise missile from the deck of the USS Wisconsin was fired
against Iraq and the war was on. Wall Street had finished trading
on the 16th at the 2508 level. [You can see that the market
treaded water for months.] But during the course of January 17,
as it became clear that the initial operations were going well, the
Dow soared 4.5% to close at 2623. Then the market stalled,
finishing at 2603 on January 22 as Saddam was still showing no
signs of leaving Kuwait.
Meanwhile, Iraq retaliated against the coalition”s bombing runs
by launching scud missiles against Israel (and to a lesser extent
Saudi Arabia) in an attempt to provoke retaliation on the part of
the Israelis, a move which Saddam knew could undermine Arab
unity. But Israel exhibited remarkable restraint and thankfully
casualties were light from Hussein”s wayward missiles. And for
one brief moment, the Iraqi leader actually had the sense not to
launch chemical weapons, as he understood this would have led
to the annihilation of his nation.
While the damage from the bombing mounted, particularly on
Saddam”s vaunted Republican Guard, the Dow Jones was
moving smartly higher. On February 22, 1991 it closed at 2889.
That same day, President Bush gave Iraq a 24-hour ultimatum;
withdraw or face an invasion. Saddam responded by setting
massive fires in Kuwait”s oil fields. Two days later the 100-hour
ground war commenced and by February 28 Saddam had
accepted the terms of a cease-fire. The Gulf War was over.
Market action was interesting during the days of the ground war.
February 24 was a Sunday.
2/22 – 2889
2/25 – 2887
2/26 – 2864
2/27 – 2889
2/28 – 2882
Then when the realization set in that it was truly over and that the
U.S.-led coalition had scored a resounding victory the market
rallied, closing at 2972 on March 5th. [However, the Dow
wouldn”t spend a whole month above the 3000 level until
January 1992.]
Now it was time to deal with the economic recession, though
Americans didn”t know that the first quarter of 1991 would be
the last one of negative growth. And President Bush would go
on to squander his unbelievable 90% approval rating, in the wake
of his success in the Gulf, to lose the 1992 presidential election
to Bill Clinton. Something about the “vision thing.”
Sources: Same as part one.
Brian Trumbore
