World of Investing : Investments in time of war

What's worrying the stock market? War. Sure, investors are disappointed that corporate profits have not rebounded vigorously and that the economy grew just 0.7 percent in the fourth quarter of last year. But those problems, too, are linked to the imminent conflict with Iraq.

Here's how the Federal Reserve put it Wednesday: High oil prices and "other aspects of geopolitical risks have reportedly fostered continued restraint on spending and hiring by businesses." As those risks lift, monetary policy and productivity growth "will provide support to an improving economic climate over time."

Translation: It's the war, stupid.

Some people believe war is good for an economy. It's not. War is a drain on a society's resources. For example, money goes into making bombs, which literally self-destruct, rather than into long-term investments that keep providing value — like, say, auto plants or computers. Smart, diligent people have their brain power and their energies diverted — and, by the way, some get maimed or killed.

On the other hand, war can change a threatening, unsettled environment into one that is more secure and conducive to economic progress. War can be seen as a long-term investment, not just in humane values and freedom – but in the economy as well.

The problem is that markets are so frightened of the uncertainty generated by an impending war that they can't see through the fog to the clearing on the other side. Ed Keon, a Prudential strategist, says, "The fear of conflict has historically been worse for stock prices than conflict itself."

After the Pearl Harbor attack, World War II and the Korean War, the market recovered — not when victory was achieved, but when force was first exerted, even if initial success was minimal. Keon, in an interview with TheStreet.com, recently predicted that the stock market would "stay weak and cautious leading up to a conflict, but then move up sharply once uncertainty is gone and victory looks clear."

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