The U.S.-led bombing of Afghanistan on Sunday did little to clear up the uncertainty that has gripped Wall Street for the last month, as market analysts debated the effect of military action against terrorism.
Some analysts said the strikes could spark a patriotism-induced stock market rally beginning today as investors express support for the U.S. taking tangible steps to combat terrorism.
But they cautioned that any rally could be short-lived and that the direction of the market over the next few weeks is likely to hinge on whether there are major new terrorist attacks.
Sunday's bombing campaign comes on the heels of a two-week stock market rally. After falling precipitously immediately after the Sept. 11 terrorist assault, stocks enjoyed a "relief rally" as the shock of the attacks began to wear off.
The Dow Jones industrial average reclaimed two-thirds of the value it lost since Sept. 11. The broader Standard & Poor's 500 did even better, recouping 83% of its losses.
Because military action against Afghanistan has been widely expected, few analysts predict a repeat of the panicked selling that gripped investors three weeks ago, when Wall Street reopened after closing for four days. The Dow lost 7.1% that first day and 14.3% that week.
In fact, several experts said stock prices may rally as investors express relief that the U.S. is taking visible action. That scenario occurred at the outset of the Gulf War in 1991, when stock prices rose immediately after U.S.-led forces attacked Iraq.
The Dow industrials gained almost 5% the day after the air campaign against Iraq began, and the Dow went on to post a 20% gain for the year.
"Monday might be a good day for equities and the start of a good week for equities," said Joseph Battipaglia, chief investment strategist at Gruntal & Co.
However, investors are well aware that succeeding against Osama bin Laden and his terrorist network is likely to be more difficult than winning the Gulf War.
Analysts have noted that the Gulf War rally was sparked in part by a realization that allied military power was likely to overwhelm the Iraqis. It is uncertain whether allied action against Afghanistan and Bin Laden's Al Qaeda network will be as effective.
More important, although there were fears of terrorist attacks on the United States during the Gulf War, there wasn't the certain knowledge that the nation's opponent clearly possessed the will and the ability to carry out such actions.
"I don't think we're going to have the same kind of optimistic response that we saw after the Gulf War," said Peter Canelo, investment strategist at Morgan Stanley Dean Witter. "People understand that this is a very different operation. This is just the beginning."
Another major terrorist action almost certainly would depress consumer confidence and drive down stock prices, experts said Sunday.
"That's going to be the key, because if [the terrorists] can show that they can strike again in any Western city after the heightened security measures we've put in place, that would be a real negative because it would disrupt the economy one more time and shatter consumer confidence," said Jim Paulsen, chief investment officer of Wells Capital Management.
In the long run, however, several experts said stock prices almost certainly would move higher if the war on terrorism appears to be succeeding.
"We don't need to capture all of the world's terrorists for the market to recover," said Edward Keon of Prudential Securities. "But we do need to see progress, and that could be any one of a number of things to show we're on the right course."
Another major factor: Although it took a back seat to Sunday's events, the slowdown in the U.S. economy clearly is creating a steep hill for the stock market to climb.
On Friday, key market indexes closed higher despite a government report showing the biggest monthly decline in jobs in more than a decade. And the jobs report doesn't fully reflect the economic fallout from the attacks, with some analysts predicting the nation's unemployment rate could surge to 6% by year's end.
In addition, over the next few weeks, companies are expected not only to unveil dismal third-quarter earnings but also to warn about equally bleak fourth-quarter figures.
"If you look at the economic picture, it's terrible," Keon said.
That had some experts convinced before Sunday that the bounce-back rally has just about run its course and that stock prices could become shaky again.
"This is not the beginning of a bull market," said Larry Rice, chief investment officer at investment firm Josephthal & Co. "There's a lot of uncertainty out there."
The market has tried and failed several times during the current 19-month bear market to achieve lasting rallies. From early April to late May, for example, the Nasdaq composite index jumped 41%. It has fallen 30% since.
Some analysts warned against becoming too bearish about stocks solely because of the risk of more terrorist attacks.