Trading One Uncertainty for Another in Iraq

For the first time in months, U.S. forces seem to have the upper hand in Iraq, moving two days ahead of schedule to transfer power to Iraqi authorities and catching insurgents off guard.

But after the positive shock of the largely ceremonial handover of power wears off, the situation in Iraq is expected to remain much as it has been for the past year. Violence will continue, U.S. soldiers will die, financial costs will continue to rise, and Bush's re-election chances will remain cloudy. For all of these reasons, U.S. stock investors need to greet the transfer of power with a healthy dose of skepticism and caution.

Earlier this month, the U.N. unanimously approved a resolution to return power to the Iraqis by the end of June. U.S. officials tried to catch Iraqi insurgents off guard by making the transfer today, two days ahead of schedule.

The U.N. resolution also legitimized a U.S.-led multinational force, which will serve "at the request of the incoming interim government of Iraq." The interim government will serve until national elections are held in December or January of next year.

Some analysts believe the transition will be a positive development for stock investors, because it means the U.S. will no longer be considered an occupying force, something that has proven costly in both financial and human terms.

"[If] we can put Iraq into the hands of Iraqis, it's a better scenario, because right now it looks like us vs. them," said Quincy Krosby, chief investment strategist at The Hartford Financial Services Group. "This makes it more their situation."

Still, many people say the U.S. will remain in control of Iraq after June 30 and that international involvement will probably be limited. More than 130,000 U.S. troops are expected to stay in the country after the transition, and Deputy Defense Secretary Paul Wolfowitz said those troops could be there for several years.

"Nobody takes seriously this so-called handover," said John Edmunds, professor of finance at Babson College in Massachusetts. "Everyone knows America runs Iraq and will run Iraq until we're no longer in Iraq."