The verdict is in. The economy is decelerating. Consumer spending is cooling off. Higher mortgage rates are dampening the housing market. Job growth is weakening. Inflation is no threat with wage increases subdued, commodity prices coming down, and automakers rolling out incentives. The bottom line? The Fed is either finished or almost done with its monetary tightening.

Better yet, the market's recent performance suggests the fear that the stock market is a bubble set to burst is wrong. Now, the word "bubble" calls up lurid visions of economic catastrophe when a speculative mania abruptly ends. Two recent best-selling economic books, Irrational Exuberance by Robert Shiller and Valuing Wall Street by Andrew Smithers and Stephen Wright, call the stock market an unprecedented bubble in American equity history.

But take a closer look at the stock market. The tech-laden NASDAQ plunged by nearly 40% from its high, and has since gained back about half its losses. In essence, investors adjusted equity values toward a more moderate growth environment. The stocks of dot-com companies with quality management are holding up while those operations burning through cash are getting hammered. A U.S. district judge orders the breakup of Microsoft, the leading company of the new economy, and investors are struggling to place an economic value on an uncertain future. Investors aren't always right in their judgment. Far from it. But in all cases, it appears that investors are acting with a degree of reason and discrimination that belies the bubble thesis.

Put it this way. It is real economic events such as the eventual success or failure of Internet-related companies, rather than manic shifts in investor psychology, which will determine what happens to the stock market.

 


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