The blood-letting in international stock markets continues. The U.S. Nasdaq index plunged below the 2,000 level for the first time in 27 months. The S&P 500 lopped 20 percent of its peak, officially becoming a “bear market.” The U.S. free fall triggered a domino effect, pushing Asian and European markets into similar tailspins. Here, the Nikkei Index closed beneath the 12,000 mark for the first time since February 1985. Investors are taking big losses, but it is important not to lose perspective. Most economies are stronger than market gyrations suggest.

The stock market losses have been most spectacular in the United States; but then, they had the eye-popping gains. After an historic economic expansion, reality has returned with a vengeance. The Nasdaq is down 62 percent from its peak last year. Businesses that used stratospheric stock prices to finance expansion are cutting back. Investors accustomed to 25 percent annual gains are fleeing. U.S. consumers are worried about the future and the prospect that the real economy will soon suffer.

While the U.S. economy has slowed, and the paper losses are huge — nearly $4 trillion — Main Street has thus far been spared much of the pain. The Nasdaq is heavy in technology stocks, and its slide is a return to what some call sane valuations. The air is being let out of the “New Economy bubble.”

The numbers from the real economy do not justify hand wringing — at least, not yet. Despite the slowdown, the U.S. job market is doing better than anticipated. Last week, the U.S. Labor Department reported that 135,000 workers were added to payrolls in February. That number is nearly a third less than January, but it was still almost twice the expected increase. The manufacturing sector is weak, but there are signs that the bottom could be in sight. Output is still shrinking, but the decline in February was less than the previous month. The auto industry, an important indicator of the overall economy, added 13,000 jobs in February and sales were better than expected.

Another Labor Department report showed that productivity rose 2.2 percent in the fourth quarter. That is less than the third quarter results, but productivity continues to grow and the increase was larger than expected.

Europe’s markets have been hit by the slide in the U.S., but overall prospects are good. Most economists predict 3 to 3.5 percent growth in the euro-zone this year and think the region can ride out the U.S. slowdown.

Asia might not be so lucky. By one estimate, exports to the U.S. have accounted for about 20 percent of growth in Asia (excluding Japan) over the past few years. There is no ready substitute for faltering U.S. demand and the ripple effects of a collapse in consumer spending would hit hard.

Japan should be the region’s shock absorber, but it has problems of its own. As Finance Minister Kiichi Miyazawa acknowledged in a moment of candor — and quickly retracted — the government’s finances are in a catastrophic situation. The economy is deflating as prices continue to fall. The banking system is saddled with too many nonperforming loans. The political uncertainty surrounding Prime Minister Yoshiro Mori prevents the government from taking action.

Yet, earlier this week the government reported that gross domestic product grew 0.8 percent in the fourth quarter of 2000, which means the goal of 1.2 percent growth this fiscal year is within reach. Moreover, the Nikkei’s plunge is not quite what it seems. Last year, the composition of the index was changed — to become more high-tech oriented — and its slide reflects the fortunes of that sector. Overall, the Nikkei is down, but according to Mr. Alexander Kinmont, strategist at Morgan Stanley Dean Witter, over two-thirds of companies in the Nikkei 500 and more than half of companies in the Topix are above 1998 levels.

Similar scrutiny of U.S. companies has convinced some strategists that U.S. shares are now undervalued. Others are not so sure. Which is precisely the point.

While the raging bull market of the New Economy may be over, the New Economy is here to stay. Unfortunately, we do not know exactly what that economy will look like. The integration of new technology is going to continue, but the effects of that process are still unclear. Change is going to be a constant, and the ability to adapt to uncertainty will be a key component of success. Predicting winners and losers is not going to get any easier. A strong stomach and a strong spine will be needed in the years ahead.

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