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January 31, 2005

Democracy in Iraq and the market

Amey Stone

When stocks began their steep slide in mid-January, I identified the pending Iraq elections as one reason investors were selling. This morning's sharp rise in stock prices following Sunday's apparently successful day at the polls, seems to confirm that theory.

Of course, today's market has also been helped by merger mania and a new dip in oil prices. But at least one stock strategist is in agreement with me that Democracy in Iraq (at least I hope that's what we now have) is bullish for stocks.

In a January 31 email, Ed Yardeni, now chief investment strategist at fund company Oak Associates (formerly he was with Prudential), wrote that "the triumph of Democracy over Tyranny in Iraq, as evidenced by Sunday's election," could be bullish for stocks, mainly because, "it could transform the Middle East in a very positive way."

As positive signs, he notes that there seems to have been more dancing in the streets in Iraq on Sunday than there was when Saddam was first ousted and points to Iraqis "courageous turnout," including daring to bring their children to the polls to witness the historic event.

I agree with Yardeni when he writes, "The loss of lives, along with the suffering of the injured, has been a very high price to pay for what has been accomplished so far, but the elections certainly give us reason to hope that a major corner has been turned toward creating a civil society in Iraq."

If that isn't enough reason for investors to cheer, he also writes that he expects the U.S.'s three-year $300 billion Iraq price tag to quickly decrease in the coming years and Iraqi rebuilding, financed with the country's own oil revenues, to spur the global economy.

Today is a good day for optimism about the potential for peace in the Middle East. Let's hope we have more reasons for optimism in the months to come.

12:37 PM

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