The Wile E. Coyote Approach to Stocks

The Dow Jones Industrial Average reached another record close on Monday, crossing 13,300 for the first time to finish at 13,312.97.

Ordinarily, this would elicit another round of cheerleading from the business press, as though the stock market were a scoreboard and the Dow was the home team.

But in light of recent downbeat economic data -- underwhelming job numbers, flagging growth, the lingering housing-related miasma, weaker consumer spending, inflation edging up -- perhaps we'll see more pieces with headlines like this April 27 story from BusinessWeek: "Dow Hits New Record After Weak G.D.P."

When the stock market seems detached from the underlying economy, it suggests that valuations no longer reflect future expectations of profit, as theory dictates, but may have become purely speculative -- perhaps even "irrationally exuberant," to use Alan Greenspan's famous assessment of the tech boom.

At his blog, economist Kash Mansori suggests that strong corporate profit growth may be helping sustain the market in an otherwise sluggish economy, along with the natural tendency of investors to take solace in a backward glance at a near-unbroken string of recent gains rather than look forward to who knows what.

But even if they are looking forward, they may be interpreting the discouraging news in the rest of the economy as prelude to a rate cut at the next Fed meeting on Wednesday.

All this suggests a circular, self-feeding process, in which no economic news can truly be considered bad by investors, as it can always be rationalized to perpetuate the rally that's already underway.

This "what, me worry?" attitude toward the chances of recession seems to work like Wile E. Coyote's technique for continuing to run where is no ground; he seems to float just fine as long as he doesn't look down.

by Robert Horning