decline far less than the S&P 500 Index that was bloated by overpriced
technology stocks.
The market subsequently rallied to over 9,000, but anxiety about a
second U.S. operation in Iraq sent the stock back down to 7,524 five
months later on March 11, 2003, just days before the invasion. But as it
responded 12 years earlier when the Gulf War started, the market rallied
on news of the invasion and continued to rise despite the growing in-
surgency in Iraq that made the war particularly unpopular.
Notwithstanding the Republican defeat in Congress in November
2006, stocks hit new all-time highs in the summer of 2007, more than re-
covering all the ground that had been lost during the 2000 to 2002 bear
market. From the end of March 2003, the first month of the Iraq invasion,
through June 2007, the annual return on the market was an extremely
strong 17.5 percent per year.CONCLUSION
When investigating the causes of major market movements, it is sober-
ing to realize that less than one in four can be linked to a news event of
major political or economic import. This confirms the unpredictability of
the market and the difficulty in forecasting market moves. Those who
sold in panic at the outbreak of World War I missed out on 1915, the best
year ever in the stock market. But those who bought at the onset of
World War II, believing there would be a replay of the World War I gains,
were sorely disappointed because of the government’s determination to
cap wartime profits. World events may shock the market in the short
run, but thankfully they have proven unable to dent the long-term re-
turns that have become characteristic of stocks over the long run.CHAPTER 13 When World Events Impact Financial Markets 235