The numbers are staggering. Since the end of 1995, household stock holdings have doubled to more than $12 trillion dollars. And, for the first time, equities are the most valuable asset of the typical American household, not the home. Little wonder most Wall Street economists believe the stock market wields more influence than ever on consumer attitudes and spending habits. Indeed, underlying the current bout of investor nervousness over rising inflation is the deep-rooted fear that a steep stock market decline will chill consumer spending and send the economy tumbling into recession.

How can the performance of stocks affect the purchase of socks? One major way is through the so-called "wealth effect." When it comes to spending money, consumers take all their financial resources into consideration, from their income to their home. When an asset surges in value for a sustained period of time, such as the stock market in the 1990s, people feel flush and are willing to spend some additional money, perhaps by buying a fancy car or by taking a more expensive vacation. A good number of Wall Street analysts blame the wealth effect for today's negative savings rate.

Of course, consumer spending contracts when assets fall in price. Clearly, the economy is more vulnerable than before to a sizeable drop in the stock market. Yet, while catastrophes do happen, I am deeply skeptical of the more pessimistic prognostications. Lost in all the gloomy chatter is an appreciation of just how strong are the economy's underpinnings. Unemployment is at a 29-year low, wages are rising smartly, and corporate earnings growth remains unusually strong. Many economists estimate that the savings rate is actually around 8% to 9%, after adjusting for capital gains. Exports should do well with growth prospects improving throughout the rest of the global economy.

There is a lot of hand wringing surrounding the 12-year anniversary of the stock market crash of October 1987 and the disturbing parallels to today. But that experience also suggests treating the wealth effect cautiously. The 30% fall in the stock market in the final four months of 1987 was followed by four quarters of 3.5% economic growth, after taking inflation into account. And that's not bad - not bad at all.