Trading One Uncertainty for Another in Iraq

Analysts say car bombings and other random acts of violence are likely to remain a way of life in the region for some time to come. Indeed, Gen. Peter Pace, vice chairman of the Joint Chiefs of Staff, told Congress this week that he expected more violence, not less, after sovereignty is returned to the Iraqis.

Of course, investors have become inured to all this aggression since the war began more than a year ago. The gruesome beheadings of Americans Nicholas Berg and Paul Johnson and South Korean Kim Sun-il had little impact on investor psychology, and attacks on U.S. soldiers have largely been shrugged off. On Sunday, there were reports on Arab TV that militants have taken two new hostages, including a U.S. Marine. The insurgents reportedly are threatening to behead them if their demands to release prisoners are not met.

Brett Gallagher, chief investment strategist at Julius Baer, said events in Iraq are far less important to the market these days than what happens with interest rates and earnings.

"The effect on the market overall is very minimal," he said. "Is what's going on in Iraq going to influence the number of routers a company buys or the number of digital cameras the consumer buys? The answer is no."

Still, ongoing turmoil in Iraq could influence the upcoming election, which is something Wall Street does seem to care about.

If headlines continue to look dire after the handover of power, support for President Bush could dwindle. An ABC News/Washington Post poll recently reported that for the first time, more than half of Americans do not believe the Iraq war was worth fighting.

Many traders on Wall Street are concerned that if Bush does not win the election in November, his opponent, John Kerry, might roll back Republican tax cuts on dividends and capital gains.

Other pundits note that the financial costs of reconstructing Iraq are mounting, and could be harder to ignore going forward.

"The only reason [Iraq] makes a difference in the stock market, regrettably, is not because of the people getting killed but because of the money that is being [frittered] away," said Edmunds.