Political/Financial-Instability Bear Markets
As economies of the world become more intertwined and dependent on each other, the potential for foreign instability to disrupt the stock market increases. The invasion of Kuwait in 1990 precipitated the bear market that set the stage for the 10-year bull market that ended with the 2000 disaster for Internet and tech stocks.
Wars and political instability are part of modern life. At any given time, there may be 30 to 40 wars in progress around the world. All wars are terrible, but the stock market is more concerned with some wars than others. The Gulf War that made Gen. Norman Schwarzkopf a hero was significant because instability in that part of the world threatened Middle Eastern oil supplies, which the United States depends heavily on to fuel our economy. Instability always leads to higher prices, and higher energy costs have a devastating effect on our economy; we could not allow those oil reserves to fall into unfriendly hands. The stock market is always looking forward: As the action in the Persian Gulf escalated, the stock market worried about the outcome and what it might mean for our economy. Would this be another Vietnam that would drag on for years and cost billions of dollars?
Energy prices are critical to our economy. Rising energy costs always have a negative affect on the economy and stock market.
Although we won the war, the stock market and economy suffered extensive damage. A bear market and a recession may have led to the defeat of President George Bush in the 1992 presidential election. The stock market's real concern with the Gulf War was the disruption of oil supplies from the region.
In Chapter 4, "Economic Indicators," we will look at some of the economic indicators that signal changes in the economy. When energy prices increase, you can be sure things are going to get worse, not better. As this is being written, California is experiencing rolling blackouts because of mismanagement by the state's utilities; crude oil is over $30 a barrel; and my natural gas bill is double what it was last year.
A soft landing is economist-speak for a recession that doesn't quite mature, but still has a negative affect on the economy.
The current debate is whether the economy will sink into a recession or have a "soft landing" with only short-term consequences. Even the experts don't know what will happen in the short run, but an unstable energy price scenario does not sound encouraging. Foreign oil problems are not the only threat to our financial well-being. A protracted recession in Japan and credit problems in Southeast Asia are sticky concerns for many U.S. companies looking to these areas for new markets. A severe recession with other major trading partners could have negative effects on our economy and the stock market.