The stock market's sharp resurgence Wednesday (followed by a slight downturn yesterday) supports our view that the American economy is fundamentally in sound shape. At the same time, the inherently volatile nature of the market, some still-unresolved structural problems and plain old superstition make it risky to predict that there won't be another plunge.
Why did the Dow Jones industrial average break with weeks of losses, gaining 488.95 points, up 6.4 percent? The proximate cause appears to have been a symbolic one.
Adelphia Communications Corp. founder John Rigas, 77, and two of his sons were arrested Wednesday, charged with breaking securities laws and noncooperation with a Securities and Exchange Commission investigation into Adelphia's activities.
Americans do not often see rich men in white shirts being led off in handcuffs. But the real point of what occurred was the signal given by the U.S. government that it will take action when it believes corrupt management has occurred, resulting in massive losses on the part of shareholders, pensioners and other unwitting victims.
The Rigases are, of course, innocent until proven guilty. They met $10 million bail and are free again, and they are still able to afford expensive lawyers. No one is imagining that they are down to their last BMW. But their dramatic arrest might have inspired more than one CEO to think: "Given what we have done, that could be me; we're going to have to clean up our act."
Wednesday's rebound also coincided with conspicuous progress in Congress on legislation to make businesses and their auditors more accountable. When signed into law by President Bush, the legislation could help to force a more conscientious approach by company and bank management, directors and accountants -- though the anomaly remains that members of Congress will still happily accept campaign contributions from the interests they profess to be reining in.
The rest of what is happening is not extraordinary -- and that is the good part. Money has to go somewhere. The redistribution of mutual fund, individual and pension fund holdings between equity stocks, bonds and cash is a constant, unending process.
One would like to think that money in the American economy flows to its most productive parts. Big state pension funds have apparently become a lot smarter post-Enron, no longer easily accepting investment counselor analyses of the soundness of particular companies, questioning balance sheets sharply themselves.
All in all, Americans can allow themselves to feel good about Wednesday's resurgence. But investors should never forget that the market can react to almost anything.
The South Korean stock market yesterday was pushed up by a report of the successful implantation of a cloned human embryo; it was also pushed down by a government investigation into insider trading in shares of the country's largest companies.
That is the nature of the beast: bear morphing into bull, bull morphing into bear, in minutes. But this week's events offer nervous investors some hope that the fluctuations in the immediate future will be fewer and farther between.
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