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Jewish World Review May 6, 2002/ 24 Iyar, 5762

Lawrence Kudlow

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Doom or boom? | Listening to Wall Streeters whine about the so-called disconnect between the rising economy and the falling stock market, ordinary investors could be led to believe that the stock market hasn't made any progress at all.

But this would be the wrong conclusion. Very wrong.

Since the post-9/11 market bottom of Sept. 21, the major U.S. indexes have grown in value by an average of 17 percent. The Dow Jones has been the best performer at 22 percent, followed by the Nasdaq's 18 percent gain and the S&P 500's 12 percent rise.

Overseas numbers are slightly better (and this helps to explain a minor slip in the U.S. dollar). The Bloomberg European 500 has gained 23.5 percent, and the Japan Nikkei 225 has appreciated 21 percent percent. The European stock market winners are Germany, whose DAX Index has jumped 33 percent, and Italy, whose Milan Index has gained 32 percent. These are followed by indexes in Amsterdam (up 29 percent), Switzerland (up 28 percent), Spain (up 25.5 percent), France (up 22 percent) and Britain (up 15.5 percent).

What's the message here? The world economic recovery is unfolding, and more stock-market gains are to come.

So far, the best of the equity bunch have been the small- and mid-cap stocks in the United States. Since last September's bottom, the mid-cap S&P 400 has recovered by 33 percent, while the small-cap S&P 600 has expanded by 41 percent.

Bravo for small-caps. They don't get the headlines. They haven't experienced massive accounting fraud, debt overhang, nonsensical merger-and-acquisition binges or irresponsible insider trading and lending. But they have registered the best stock-market performance overall.

Large-cap stocks haven't yet hit their full stride in part because of a lingering credit crunch -- in the United States, bank loans and commercial paper issuance haven't risen in a year. But this will soon change, as the recovery in corporate earnings gains momentum. Then the big-caps will outperform their smaller-cap brethren.

To understand what's behind the global stock-market rise, you have to look to the central banks. After years of monetary deflation, the central banks in Europe, the United States and Japan have finally come to their senses by pumping a considerable amount of money into their economies during the last six months or so. Better late than never.

Money matters, of course. Despite what the day-to-day-obsessed gurus in the Wall Street investment fraternity may be saying, Main Street members of the investor class should hold this thought. Money always matters. Substantial injections of new central-bank cash in the economies of Europe, Japan and the United States are spearheading a global recovery in stocks.

Of course, tax rates and regulatory burdens also matter, especially for longer-term investment and growth rates. Private-sector businesses always respond favorably to reduced tax and regulatory burdens. Businesses (and individuals) put the extra cash flow to work by increasing their output and taking more risks.

On the home front, President Bush has led the way with personal and business tax cuts, and the Alan Greenspan Fed has obliged with an accommodative monetary strategy. And overseas, there is a growing likelihood that right-of-center, pro-business candidates will emerge victorious in national elections pending in the Netherlands, France and Germany, with conservatives having already won in Italy and Spain.

Should fiscal policies move in a more free-market and pro-growth conservative direction in Euroland -- where voters are tired of high unemployment, unlimited immigration that threatens homeland security and a loss of national sovereignty to European Union bureaucrats -- world economic growth could see a major boost.

The Euroland shift will also help President Bush in the global war against terror. You wouldn't know it from the statements of leftist European leaders who are in bed with terrorist nations like Iraq, Iran and Syria -- as well as Yasser Arafat and the PLO -- but Main Street Europeans value freedom, democracy and prosperity just as much as their counterparts in America.

On Wall Street today, there are too many doomsayers who believe a double-dip recession is on the way. If they'd only open their eyes, they'd see that economic and political events are taking a turn for the better. The world is moving in the right direction, and the stock markets will most definitely reflect these positive global events.

JWR contributor Lawrence Kudlow is chief economist for CNBC. He is the author of American Abundance: The New Economic & Moral Prosperity. Send your comments about his column by clicking here.


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