- The Washington Times - Tuesday, April 25, 2000

The bear that stalked the market so recently appears to have retreated. Higher than expected corporate profits have lured back the bulls but they are taking only tentative steps forward.

Companies' good first-quarter earnings have stoked investors' confidence in America's cycle of non-inflationary prosperity. Corporate strength was seen across the board, from technology to "old-economy" firms. A healthy corporate sector augurs well for future innovation and productivity increases, which helps supply keep pace with America's heady demand.

Investors continue to be wary, however, about the prospect of inflation. The Labor Department reported that unemployment benefits plunged to the lowest level in almost 27 years. The tight labor market could lead to wage inflation if companies are unable to come up with ways to boost supply through innovation, rather than labor. Last Friday, higher than expected inflation data triggered a wave of aggressive stock selling.

Investors will be closely watching this week's release of gross domestic product figures, which could show an annual rate of domestic demand as high as 8 percent. Taken in combination with the tightest labor market in about 27 years, the demand could cause the inflationary economic imbalance that has long worried Federal Reserve Chairman Alan Greenspan. In addition, increasing levels of margin and other types of debt coupled with some sky-high equity prices have fueled concerns that an economic bubble threatens the current prosperity.

On the other hand, the new economy has defied most conventional economic logic. High rates of growth and low unemployment have coexisted at levels previously thought to be unsustainable. "I see no reason that productivity growth cannot remain elevated, or even increase further, to the undeniable benefit of American businesses and workers," said Mr. Greenspan earlier this month, at the White House conference on the new economy. His statement cheered the market, especially since Mr. Greenspan added that he wasn't attempting to bring down stock prices through monetary policy.

"The persuasive evidence that the wealth effect is contributing to the risk of imbalances in our economy, however, does not imply that the most straightforward way to restore balance in financial and product markets is for monetary policy to target asset price levels. Leaving aside the deeper question of whether asset price targeting is an appropriate governmental function, there is little, if any, evidence that monetary policy aimed at achieving that goal would be successful."

Mr. Greenspan's clarification on this front was sorely needed. The Fed chief's consistent concern regarding the "wealth effect" created by a rise in stock prices had caused many investors to view Mr. Greenspan with suspicion. Although Mr. Greenspan's judicious handling of monetary policy has helped prolong years of economic prosperity, some investors were convinced the inflation hawk was determined to rein in Wall Street bulls in order to temper demand.

It is still unclear whether the bulls or bears will dominate next week and thereafter. The bulls have a robust corporate sector, good overall prospects for innovation and an unwavering economic expansion to spur them forward. The bears, on the other hand, could be brought out by a dwindling labor pool, the prospect of inflation and wariness regarding a debt and market-induced economic bubble. Only time will tell whether the bulls or bears will dominate.

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