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.
The rebound in stock prices from five-year lows in October in part suggested widespread expectations that a U.S.-Iraq war would go at least as well as the Persian Gulf War in 1991 and the Afghanistan conflict after the Sept. 11 terrorist attacks.
By contrast, the mood ahead of the start of the 1991 war was much grimmer, said Ted Bridges, who helps manage $1.5 billion at Bridges Investment Counsel in Omaha.
"People were far more worried about the outcome of that war" before it started, he said. That left room for the market to rally after the fighting began and it was apparent the United States would prevail, he said.
Indeed, the Dow surged 10.6% in the first quarter of 1991.
One popular gauge of professional investors' sentiment is a weekly survey of market newsletter editors by Investors Intelligence. The survey last week showed 50% of newsletters were bullish on stocks. That is far above the 34.5% bullish reading just before the Gulf War began on Jan. 17, 1991.
Brett Gallagher, U.S. stock chief for Bank Julius Baer in New York, believes that investors probably are right to assume that a war would go relatively well for the United States.
But if that is already priced into stocks, there is no reason to bet on a rally once a war begins, he said. He contends that the market is too expensive: Standard & Poor's calculates that its S&P; 500 blue-chip index is priced at about 16 times estimated 2003 operating earnings per share.
At the start of 1991 the S&P; index's price-to-earnings ratio based on actual operating results in 1990 was about 13.
An apparently dimming view of U.S. assets on the part of foreigners may be weighing on some domestic investors as well: The dollar continued to sink last week, hitting multi-year lows against the euro.
Fed policymakers this week are expected to keep short-term interest rates at 40-year lows. But Wall Street will be waiting to see what, if anything, the Fed says about the dollar. If the buck were to plunge, one way to defend its value would be for the Fed to raise rates.
Even investors who are looking beyond the war threat, and are focusing on business fundamentals, have had fewer reasons to cheer over the last week.
Fourth-quarter corporate earnings reports have come in about as expected, according to Thomson First Call. When all reports are in, analysts expect blue-chip companies overall to show a gain of about 12%, on average, from a year earlier.
And the beaten-down tech sector has been a pleasant surprise for some investors. Some Internet-related companies, in particular, have reported better-than-expected results.
But Chuck Hill, research chief for Thomson First Call in Boston, said the 2003 outlooks given by many other companies in their reports have been disappointing. That is causing Wall Street analysts to trim their earnings estimates for the first and second quarters, he said.
The average analyst estimate for second-quarter S&P; 500 year-over-year operating profit growth now is 9.4%, Hill said. That is down from 16.4% four months ago and 10.9% on Jan. 1.
"It's what is happening to estimates that is the concern," Hill said. The upshot is that investors who already expected the bulk of 2003 economic growth, and profit gains, to occur in the second half may have to further "back load" their hopes if near-term results fall short.
The question then becomes whether investors will be confident enough to hold stocks -- waiting for a second-half upturn -- or whether more will decide to sell and come back if or when the outlook becomes clearer.