Numbed Market Shrugs Off Kosovo, Perhaps at Its Peril

The big exogenous events that were meant to shake the market haven't done it, but that doesn't mean this conflict won't have repercussions.
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Rube Goldberg machines always come to mind when people are talking about how exogenous events are going to affect the stock market.

They go something like:

Senate

trial of

President Clinton

(unexpectedly) drags on; new witnesses are called; horrible revelations are made; public perception shifts; Clinton resigns;

Robert Rubin

decides he could never work with

Al Gore

, so he retires to Fiji; and

Alan Greenspan

, hearing that the tennis there is good, goes with him. And stocks collapse.

One of the hallmarks of this market has been its incredible resilience. Chicken Littles may come, screaming dismal things like, "Iraq!" or, "Ken Starr!" but little comes of it, except perhaps a quick chance to buy at slightly lower levels.

And so here we are again.

NATO

is dropping bombs on Serbia, the trouble in Kosovo threatens to spill over into Albania and Macedonia, the latest attempts to broker a peace have failed and Russia is increasingly unhappy with the U.S.-led action. A horrible thing, but does it affect the stock market? Sure, you may be able to construct some series of events that will somehow hurt stocks, but this is a market that has come back from the Asian economic collapse and the Russia-cum-Brazil-cum-

Long Term Capital Management

crisis. Those had a direct bearing on the financial markets and yet their effects were, with hindsight, short-lived. It makes Kosovo hardly seem like a reason to sell.

"Oh, sure, there's some companies that will be hurt by the war in the Balkans," says Tom McManus, equity portfolio strategist at

NationsBanc Montgomery Securities

. "But for the majority of U.S. stocks, the impact is psychological, not fundamental."

'I would have thought, everything being equal,

the conflict should have put a little pressure on the P/E multiple simply because of uncertainty,' says J.P. Morgan's Doug Cliggott. 'I would think that it added a dimension of risk that wasn't there a week ago.'

Indeed, it's hard to see how anything in Serbia could really hurt stocks. Perhaps the conflict could make for a sustained fall in the euro, hurting U.S. multinationals. The conflict could get more heated, forcing commodity prices higher. Relations with Russia could become strained, drying up the peace dividend in the Treasury market and sending interest rates higher. Somehow all of these things sound like Rube Goldberg machines.

"The fact is that unless this spins completely out of control, this is a backwater country," says Courtney Smith, chief investment officer of

Orbitex Management

. "It's not important for the U.S. economically."

But there is that spinning-out-of-control thing, isn't there? That 0.1% chance that things go really awry. A slim chance, but a chance nonetheless. One would think that would be worth taking into account. Sure, it is something that's hard for the stock market to quantify, but it's still something, isn't it?

"It is hard to plug in a shooting war in Europe, what it means for earnings or interest rates," says Doug Cliggott, equity strategist at

J.P. Morgan

. "But I would have thought, everything being equal, it should have put a little pressure on the P/E multiple simply because of uncertainty. I would think that it added a dimension of risk that wasn't there a week ago."

But clearly the market has not thought so. The war escalated over the weekend, and the market jumped higher on Monday, the

Dow Jones Industrial Average

taking out that vaunted

10,000 level. Speculates Cliggott: "It highlights a mood or a current psychology that is very aggressive and not very concerned with downside risk. It's far more concerned with upside potential."

Asia, Clinton, Russia, Brazil, Iraq. And now Kosovo. Another thing that probably will not hurt the market. But one worries sometimes that investors, having seen the market come back so many times, no longer believe there is anything out there that could lay it low. It is reminiscent of a boxer, face numbed by jabs, who can hardly feel it when the real punch comes, ripping him apart.