The volatility in the stock market is stunning, almost frightening in its violence. And despite periodic rallies, stock prices keep heading lower. The tech-laden Nasdaq is down 16% for the year. The Dow Jones Industrial average is down 11%. The Bloomberg Internet index is off by 44%.

What is behind the market turmoil? Simply put, investors are realizing that the Federal Reserve Board's monetary tightening campaign has succeeded in slowing the economy. The loss of momentum is showing up in a cascade of disappointing corporate earnings reports from brand name companies like Intel, Home Depot, and IBM. Wall Street analysts are belatedly revising down their corporate profit forecasts for the rest of this year and next. For instance, economists at Merrill Lynch now predict that earnings in the high-tech sector will drop from the mid-30% range this year to a low-20% level next year. What's more, investors are deeply worried that the soothing metaphor "soft landing" to capture the economy's trajectory is wrong. The more accurate term may be "recession." But hold on. A weak market does not necessarily signal a downturn in the business cycle. The U.S. economy is healthy, and productivity growth is strong. There is no banking crisis. Unemployment is at a 30-year low. Inflation, despite last month's spike in consumer prices, is still tame. The odds still favor continued economic growth and a decline in stock market volatility.

Of course, the wild card in any forecast today is the outlook for oil prices. If the truce in the Middle East holds, oil prices could easily retreat to $30 a barrel or less. But $40 barrel oil isn't a far-fetched figure if pitched battles resume between the Israeli's and the Palestinians.

 


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