The Lewinsky Market?

What is driving the stock market to new highs? It seems that just about everyone I talk to is rubbing their eyes at the Dow's blast through the 8500 barrier.

Yes, the economy is in good shape. The federal government will post its first budget surplus in thirty years. Unemployment is at a quarter century low. The consumer price index is up a mere 1.6% over the past year, and inflation is going nowhere with a tidal wave of low-cost imports washing up on American shores. Over the past two years, productivity growth has averaged a hefty 2%. Better yet, all across America managers are burning the midnight oil struggling to figure out how to wring further efficiencies from their businesses - and keep productivity growth high.

Still, the stock market's heady surge has had an aura of being driven higher by the animal spirits of investors and the madness of the crowd rather than from a push by the fundamentals. Whirlpools of speculative bubbles often ripple on top of a steady stream of enterprise. Perhaps what we are witnessing is a Clinton poll bounce - the other gravity defying feat of recent weeks.

At least that's what David Hale, economist at Zurich Kemper, thinks. The "Lewinsky bubble" is an intriguing idea. He bases the insight on the University of Michigan's consumer confidence survey for February, which uncovered an unprecedented improvement in how consumers assess the economy. But, the report goes on to say, "the early February surge lacks a credible economic foundation."

Instead, the media gets the credit -- or blame--for investor euphoria. Much of the press coverage surrounding Monica Lewinsky and the Kenneth Starr investigation has drawn a sharp contrast between the scandals and the economy's stellar performance under Clinton. Some 48% of surveyed consumers, when asked about the economic policies of the government, were favorably impressed. That figure tops the previous peak reached under Reagan by a huge 10 percentage points.

Lewis Carroll wrote, "Everything's got a moral if only you can find it." Wall Street loves to portray itself as rational, analytical, and tough-minded. But investing is as much a social activity as it is a money making endeavor. The chatter in the markets is incessant. Rumor. Research. Gossip. Information. Bad jokes. Data. Because there is so much noise in the markets, fads, fashions, and capriciousness sometimes rule.

The economy remains on solid ground. But I wouldn't get carried away with the stock market's record-making run. Asia could take a dangerous turn. Clinton could appear more vulnerable. Passions could cool. Caveat Emptor.


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