Too early for panic

Panic certainly is not the correct word, but what struck many of the world's leading stock markets (Wednesday) gave investors everywhere cause for concern. After sharp year-end increases, share prices everywhere seemed to fall suddenly, even though the financial news remained mostly positive.

This week has not necessarily brought that long-predicted bursting of the stock market bubble. Many market observers, who consider themselves rational, claim price levels are far too high to be sustained and that a so-called "correction" -- meaning a sharp and lengthy decline -- is long overdue. But others predict many more bullish days ahead, with the Dow Jones Industrial Average doubling or tripling its recent peak before common sense economics takes hold.

When attention turns to fundamentals, the news is largely positive. The United States economy remains strong, despite much fretting about inflation that has not arrived and interest rates that soon may climb a quarter of a percentage point or so. Most of Western Europe continues to show gains, while an Asian recovery continues, even if a bit wobbly.

None of this means that share prices cannot tumble a great deal more; often there is nothing particularly rational about their rise and fall. But, if underlying conditions remain strong, this week should not see the beginning of the end. John Kenneth Galbraith, seldom an admirer of Wall Street, has noted: "Cause and effect run from the economy to the stock market, never the reverse."

Some modern contrarians claim stock markets, especially American ones, are in fact holding up the world economy, that falling share prices will bring everything down. But while there may well be more declines ahead, even sharp ones, it seems too early to join ranks with the prophets of doom.

-- The South China Morning Post, Hong Kong