Wall Street moved onto a war footing today as stock exchanges and brokerage firms prepared for possibly volatile trading days to come. Officials at the New York Stock Exchange and the Nasdaq Stock Market said they had plans in place to handle chaotic wartime trading and to keep markets running in the event of any domestic terror attacks sparked by a U.S.-led effort to oust Iraqi leader Saddam Hussein.
At the NYSE, officials said they were confident they could easily handle any massive war rallies or sell-offs. The stock exchange is capable of handling five times the current average daily trading volume, a spokesman said. Nasdaq officials also said their systems could handle large volume increases.
Both the NYSE and Nasdaq established emergency procedures after the Sept. 11, 2001, attacks on the World Trade Center and the Pentagon to try to prevent terrorists from disrupting trading.
New York Stock Exchange officials said they have established a backup trading floor and duplicate computer systems that would prevent any breakdown in the flow of information from brokerage firms to the floor. Such a breakdown was a key reason the NYSE remained closed for four days after Sept. 11.
Nasdaq officials also said their post-Sept. 11 decision to duplicate trading technology would make it virtually impossible for terrorists to interrupt operations. For security reasons, officials at Nasdaq and the NYSE declined to provide details of their plans.
The NYSE and Nasdaq plan to follow their standard "circuit breaker" procedures in the event that adverse developments in Iraq, or terror attacks at home, lead to large stock sell-offs. At the NYSE, each drop of 850 points in the Dow Jones industrial average before 2 p.m. would close the market for one hour. Between 2 and 2:30 p.m., each such drop would close the market for 30 minutes. If it happened after 2:30 p.m., trading would continue as usual. If the Dow plunged a total of 2,250 points or more, trading would automatically be halted for the day.
The NYSE circuit breakers are set each quarter as 10, 20 and 30 percent of the Dow Jones industrial average's closing value the previous month, rounded to the nearest 50 points. The circuit breakers will be recalibrated on April 1. Nasdaq uses the same method to calculate its circuit breakers, meaning curbs will be set at 150, 300 and 400 points.
Analysts and strategists predict a volatile market in coming weeks as investors react to events in Iraq, buying stocks on positive news and selling them at any sign of trouble. "You tell me how the war is going to go, I'll tell you how the market will perform," said Henry Cavanna, of Cavanna Capital Management.
The stock market often responds dramatically to major domestic and international events. For instance, the Dow plunged after the Pearl Harbor attack in 1941 and the assassination of President John F. Kennedy in 1963. Trading was halted in both instances. The Cuban missile crisis in 1962 and the resignation of President Richard M. Nixon in 1974 also sparked major market declines.
Many analysts and strategists interviewed today, as U.S. stock indexes soared by more than 3 percent, said they were betting on a quick and easy war. Thus they were urging clients to move money out of Treasurys and corporate bonds and into the stock market, anticipating an extended relief rally similar to the one that followed the beginning of the 1991 Gulf War and drove stocks up 20 percent. In recent weeks, investors have fled stocks and moved into bonds, sending bond prices higher and yields on Treasury securities down to levels not seen since the 1950s.
A smooth war effort would also probably mean lower oil prices, so they are already advising clients to sell oil company stocks and buy domestic retail. They predict a successful war will lead to increased consumer confidence and more spending.
Some strategists say technology stocks, which have fallen substantially, could gain from a war rally, although others say the shares are still overpriced, especially in the current sluggish economy. Jack Caffrey, equities strategist at the J.P. Morgan Private Bank, said he viewed technology shares as a trading opportunity. He said his firm may buy tech shares, but only to sell during a war rally, not as a long-term investment.
Money managers also cautioned that if the war goes badly and casualties begin to mount, the market could turn down very quickly. "The first Gulf War was a lot simpler than what we are undertaking now. There are a lot of risks associated with this war and this market," said Cavanna. He said that if the war effort falters, defense and energy stocks could be among the few that might do well amid a general decline.
Today, investors seized on news that President Bush would issue a final ultimatum to Hussein and drove the market to its strongest day of the year. The Dow Jones industrial average finished up 282.21, or nearly 3.6 percent. The broad Standard & Poor's 500-stock average gained 29.52, or 3.5 percent, while the Nasdaq advanced 51.94, or nearly 3.9 percent.
"Markets like certainty, even when the news is bad," said David Kotok, president of Cumberland Advisers in Vineland, N.J. "They don't like uncertainty. Today's rally marked a period of prolonged uncertainty coming to an end very quickly."