Wizards, or windbags?

The sound of war drums has launched a flotilla of questions for most Americans.

Not least among them: How will the stock market - on which many workers place their hopes for a comfortable retirement - react?

There's never a shortage of credible-sounding forecasts from Wall Street's investment strategists. And the uncertainty of a looming war never fails to ratchet up forecaster chatter.

Because war is laden with variables, the talk is often contradictory.

Experts cite a long history of inconsistent market reactions to conflict. "Sometimes the market went down after war started, sometimes up," says Ken Tower, chief strategist for CyberTrader Inc., a research unit of Charles Schwab that has examined market reaction to wars. "The results often seem dependent on whether the outcome was a surprise or not."

Surprise is no stranger to market prognosticators. Only 1 in 10 highly qualified forecasters interviewed by the financial magazine Barron's a year ago, for example, correctly predicted that the Standard and Poor's 500, a broad measure of the US stock market, would end down for 2002.

Confronted with that reality, most strategists admit that they view their "announced target" levels for the market as informed guesses.

Observers are also quick to point out that while many strategists - both optimists and pessimists - are candid, some are "required" to be more consistently bullish to the public than they might be if they could speak anonymously.

"Much [Wall Street] research is generated by organizations that have a vested interest in selling something," says Ed Easterling, president of Crestmont Holdings, a hedge-fund management firm in Dallas.

"They are using that research to sell their products, so we need to recognize that that is the case," he says. "If we were getting our weather forecasts from an umbrella manufacturer, we would be very skeptical."

Still, many personal-finance experts agree, market forecasts can be worth listening to. The key: using them as you might use the Weather Channel in preparing a weekend trip - to monitor developing patterns while staying prepared for just about anything.

So how should investors review forecasts and research? "When we read research [or forecasts], we are trying to understand what the source is, how the research is being used, whether [it] is fundamentally based, and whether [it] is consistent with history or ... a distortion," adds Mr. Easterling.

So what's the current forecast?

Mr. Tower notes that the Wall Street consensus for the short term is that the market will rally sharply for two or three weeks when and if fighting starts in Iraq, and then be vulnerable to a decline. After that, experts turn to history.

Looking longer term, the Dow has risen more than 30 percent, on average, in the 18 months after "major events ... that precipitated war," according to Gibbons Burke at www.MarketHistory.com.

That includes the Spanish-American War, World Wars I and II, the Korean War, the Vietnam War, and the 1991 Desert Storm offensive that ended Iraq's occupation of Kuwait.

Mr. Burke notes that in the period following the Sept. 11 attacks, the market initially acted as it had in the past, but now after 18 months, the market is lower than in September 2001.

He believes the current military buildup is energizing only a small portion of the economy, so the bear market has outweighed any positive market impact so far.

"When war [in Iraq] happens or when the situation is resolved, we'll be watching to see how much money comes into the market," Tower says. "What we really need to see to have more confidence that the market is headed higher over the next two or three years is to have a rally that takes us higher than the late-November highs, when the Dow Jones Industrial Average topped 8900.

"If the market starts to make lower lows instead, that shows that the sellers are dominating the course of the trading day, and that just adds up to weeks and months [of decline]."

While much talk about a war with Iraq focuses on parallels with the Gulf War, at least one mutual-fund manager, John Hussman, suggests that the appropriate historical parallel might be the 1964 Gulf of Tonkin incident. The event pushed the US into the Vietnam War and precipitated "the emergence of the Khmer Rouge, following the 1970 invasion of Cambodia," as Mr. Hussman contends at his website, www.hussman.net.

Hussman, of the Hussman Strategic Growth Fund, worries that adding war to the mix of "overcapacity, low savings, and a massive current-account deficit ... might create the 'perfect storm' " of variables to give the market a lashing.

Looking over the next four to 10 months, Wall Street forecasts range widely. On the bullish end of the spectrum, Thomas McManus of Bank of America Securities anticipates that the market could gain more than 25 percent over current levels by the end of the year. As recently as Feb. 10, he increased his recommended equity weighting - the percentage of stocks in a portfolio - from 70 to 75 percent.

Al Goldman, chief market strategist for A.G. Edwards, shares Mr. McManus's outlook. His year-end projections for index gains from current levels range from 24 percent for the S&P 500 to 30 percent for the Dow.

Less enamored with current stock-market valuations is Warren Buffett, who states in his just-released annual letter to Berkshire Hathaway shareholders, "[W]e still find very few [stocks] that even mildly interest us." (Still, Buffett's company continues to hold $28 billion of stock in American Express, Coca-Cola, Wells Fargo, and other companies.)

Experienced market observer Peter Kendall is downright pessimistic. He currently anticipates market declines in the coming months in excess of 25 percent.

Mr. Kendall, co-editor of the Elliott Wave Financial Forecast, believes that the primary movers of markets are major swings in mass psychology. In his view, "stock performance for the foreseeable future topped three years ago" and declines will continue for some time to come.

While Kendall focuses on swings in "mass psychology," other thinkers eye the shifting political winds. Zbigniew Brzezinski, national security adviser to President Carter, recently warned, "[T]he United States has never been so isolated globally ... since 1945."

And the fallout from isolation can be significant. Former stockbroker Jay Little, a highly regarded market veteran based in Seattle, notes that if the US attacks Iraq without a broad-based coalition, one result might be an increased tendency for terrorists to focus retaliatory strikes on the US, rather than on the West as a whole.

More broadly, the souring of relations with traditional allies may exact a large cost by slowing or reversing foreign investment in US markets - investment that has provided important support for the US economy and markets, say several experts.

"Is a change in the perception of the US going to encourage foreigners to dump dollar-denominated assets? I think the answer is potentially yes," says Charles Kupchan, a senior fellow at the Council on Foreign Relations and author of the new book "The End of the American Era."

Attacking and occupying Iraq would create a new American colony, and seriously degrade international institutions and alliances, says Mr. Kupchan. "I think it's going to hurt the investment environment for a long time to come."