Leo Grohowski, chief investment officer for Deutsche Asset Management in New York, has figured for some time that war between the United States and Iraq might be inevitable.
But his investment decision-making has been guided in part by the assumption that the United States would quickly prevail in any conflict, leading to a fast rebound in financial markets' confidence.
It's a popular opinion on Wall Street. And that is giving Grohowski, and others, some pause. "The problem is everybody thinks that," he said. "Everybody assumes that's going to be the outcome."
If markets aren't already pricing in some potential for disappointment, they could be set up for big trouble if a war doesn't follow the script.
Those fears may have been behind last week's stock market drubbing, which sent most major indexes into the red for the year to date.
The Dow Jones industrial average dived 5.3% for the week, including a 2.9% drop Friday that left the index at a three-month low of 8,131.01.
The confidence that many investors exuded in the first two weeks of the year -- even as war worries mounted -- has waned as the Washington-Baghdad rhetoric has escalated.
This week, markets may have to contend with much more of the same. Today, United Nations weapons inspectors will deliver their report on Iraqi arms to the U.N. Security Council. On Tuesday, President Bush will give his State of the Union speech, which is certain to focus on Iraq.
Also, investors will get the Federal Reserve's latest assessment of the economy when policymakers issue a statement Wednesday after concluding their first meeting of 2003. On Thursday the government will give its initial estimate of fourth-quarter economic growth.
And all week, fourth-quarter corporate earnings reports will continue to dominate the business headlines. The reports of the last two weeks have left many money pros disappointed.
Amid rising uncertainties over the war threat, the economy and earnings, more investors may decide that the smarter place to be is on the sidelines, some analysts warn.
"The more you wait and see, the more it confirms you should wait some more," said Alfred Kugel, senior investment strategist at Stein Roe Investment Counsel in Chicago. That isn't his stance, he said, but he believes it describes a growing number of market players.
A key issue is whether investors are beginning to think that they've been too sanguine in assessing how a U.S.-Iraq war might go and the effects on consumer and business confidence, the economy and markets.
