Stock markets have a longstanding (and self-proclaimed) reputation as predictors of the economic future. So, are the markets of North America, Asia, and Europe telling us something by dropping sharply in recent days?
America's economy, currently the major engine of global growth, is ticking along quite well, with efficient export industries, rising wages, low unemployment, inflation so low it borders on deflation, and signs of rising productivity - the ultimate measure of future living standards.
Japan's economy is muddling through its long restructuring. China continues to move toward Hong Kong's model, rather than vice versa. International rescue of Thailand from its banking crisis leaves that nation and its neighbors in sounder condition. Europe's major economies, though slipping in their self-ordered belt tightening, are growing again. Expanding global trade continues to raise living standards for hundreds of millions of people.
So what do stock market setbacks mean? Most reasons given for the recent retreat in US markets make sense. Some investors are selling to take advantage of lower capital gains taxes. The big Dow Jones stocks have risen too far too fast (up more than 28 percent in three months). Gillette, Coca-Cola, and Microsoft warned earnings won't measure up. The UPS strike creates uneasiness about future earnings and inflation.
But such reasons for caution do not reverse the overriding rationale for a generally upward trend in markets in coming years:
1. US baby boomers will continue to put away hundreds of billions in retirement funds. They will also inherit and invest trillions in coming decades (more under new tax law).
2. Private sector retirement programs are spreading worldwide.
3. Global competition should keep inflation low; trade expansion rewards efficient companies and their stocks.
In short, the markets are likely to do what they have done through most of this century: trend generally upward, with necessary corrections and occasional roller-coaster rides.