Why stock market shifts in sync with war in Iraq

"Everything is accelerated, and the transmission of information is so much faster," says Jay Mueller, director of fixed income at Strong Capital Management in Milwaukee. "This means that some of the lessons investors learned from the first Gulf War can be applied more quickly."

They are also getting some help. For example, Charles Schwab's Washington Research Group has lined up retired Air Force Gen. David "Bull" Baker to help clients. "He's been very useful, helping us parse some of the language and understand what to expect," says Mr. Mueller.

Some institutional investors have their own battle plans to deal with the market's volatility. That's the case with Houston-based Mark Roach, comanager of the CDC Nvest Large Cap Value Fund. "My strategy is to buy on down days and not get caught up in the emotion," says Mr. Roach, who then sells on up days when he has a 15 or 20 percent gain.

He thinks the market will continue like this for a while. "If I had to make a guess about the market, I would say we'll be traveling a lot of distance up and down. But in the end, we will not have gone anywhere."

This kind of volatility is keeping many individual investors on the sidelines, if not out of the market. "Basically what you see is investors taking money out of equity funds and putting it into bond funds or bank accounts," says Sam Stovall, a senior investment adviser at Standard & Poor's in New York.

This is a change from 1991, when most investors rode out the war. "There has been a lot more psychological damage to investors today," says Mr. Stovall. "We've been suffering through three years of a down market."

This means that investors seem to be ignoring economic news that might buoy the markets. Congress, for example, is moving toward passage of some sort of tax cut that should provide fiscal stimulus. "It should have encouraged investors," says Mr. Richardson of Eaton Vance.

Instead, investors are worried there could be surprises ahead on the battlefield. "Do the Iraqis use chemical weapons?" asks Mr. Jacobson of Jefferies & Co. "If they do, it changes the whole mix. We could see troops from other countries."

Richardson, however, thinks the use of weapons of mass destruction would be viewed negatively by the market. "It takes us into further new ground," he says.

So far, Wall Street is expecting the war to be over relatively quickly. But if it drags on, media attention might turn back to the economy - in terms of how much damage it can sustain from an extended war. "If the war is protracted, it affects consumer and business confidence, and that could ripple through to a double-dip recession," says Stovall.

Whether that happens, however, is far from clear. "The fog of war is being replaced by the humidity of the headlines," says Stovall, "and investors are sweating it out."

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