Financial professionals work on the floor of the New York Stock Exchange Drew Angerer/Getty Images

Rational Irrational Exuberance?

We tend to be uncomfortable with the notion that an economy’s fundamentals do not determine its asset prices, so we look for causal links between the two. But needing or wanting those links does not make them valid or true.

SANTIAGO – The timing was exquisitely ironic: equity markets peaked – and a week later began crashing – just as pundits left this year’s World Economic Forum meeting in Davos, where they concluded that the global economy was on a steady upswing. In the weeks since, experts have divided into two camps.

Some, including new US Federal Reserve Board chairman Jerome Powell, believe that economic fundamentals are strong, and that what stock markets experienced in early February was only a temporary hiccup. In this view, there is nothing keeping major central banks from carrying out “beautiful” (that is, gradual and painless) monetary-policy “normalization.”

Then there are those who believe that fundamentals are in fact weak, that the current upswing will prove unsustainable, and that investors should regard stock-market gyrations as a necessary wakeup call. If so, the challenge for monetary and fiscal authorities is not to “normalize” policies but to develop new tools to fight the slowdown that will come, sooner or later.

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