In today's markets, I believe, experience is the only valid teacher. The economics being born today will be the schoolbook for the children of tomorrow. No comparisons with days gone by are applicable to the forces that govern the market today. The drama of high valuations, excessive volatility, double-digit corporate profits, day trading, low unemployment, rising interest rates (warranted or not), the technological revolution, biotechnology advances, global expansion, and politics are just a few ingredients which make up this witches' brew of uncertainty. The result is a Jekyll-and-Hyde market where emotional expectations can change as quickly and abruptly as a school of fish changes direction.
Certainly, we're in an era of opportunity never before seen. The rules governing this era of prosperity, however, have yet to be established. Greenspan, for all practical purposes, is old-school both in education and in thinking. His decision to raise interest rates the last 12 months is logical, considering that commodities have shot up in price during that time. Crude oil was rising at an uncomfortable pace. The stock market (the Nasdaq, that is) was racing ahead without speed bumps. The nation's unemployment level was at white-knuckle levels, and the gap between consumer spending and consumer savings continued to swell. Will he soft-land this elephant called the U.S. economy? Time will only tell.
If he does, and the economy slows to a more acceptable pace and the stock market stabilizes and begins to take on more rational behavior, I will be the first to write a check to the "Add Mr.Greenspan's Face to the Mt. Rushmore Foundation."
The media and its pundits have put a spin not only on the turmoil that exists in today's market, but on the potential economic effects of a 40% drop in the Nasdaq. The stock market crash of '87 did not yield any significant change in economic statistics for nearly two years. The ramifications of that drop, however, were set in motion then, and finally did erupt into a nasty recession.
The financial background surrounding the Nasdaq's drop is completely different from its 1987 counterpart. It's those differences that may make the Nasdaq's drop far more damaging. The rise of the Internet, e-commerce, global competition, and its potential deflationary implications will exacerbate any potential recessional event. The Federal Reserve's tightening monetary policy must be warranted. Any miscues by the Fed at this point could be extremely damaging.
In any event, tomorrow continues to obliterate the old schools of thought.