Down Because It Was Up ....

World equity markets fell sharply yesterday. Most were down 2% to 3%. This has more to do with the speed of stocks' advance in recent months than anything else. Here are some factors that make me less concerned about a market downturn:

Durable expansion. Americans can expect solid first-half U.S. growth and continued economic strength abroad. Fourth quarter gross domestic product will be revised down today, but with positive implications for 2007. It looks as though housing will subtract from U.S. GDP in the first and second quarters, but not as much as in the second half of 2006. Consumption growth remains strong. With bond yields low around the world, it looks like the environment remains favorable for growth and equities.

China's sell-off is valuation-related — simply, the prices are too high. Fundamentally, there is little new going on in China that would qualify as an inflection point. China has been trying to slow things down for years, using monetary and tax policies. Shanghai's equities fell 9% on Tuesday, but after having gained 16% from February 5 through February 26 to an all-time high. Market cap had risen to $1.1 trillion, versus $1.04 trillion for Hong Kong. A note by my Hong Kong-based colleague Michael Kurtz at Bear Stearns, circulated in January, warned: " China (Underweight): Valuations Now Excessive, Stocks are Over-owned, and Liquidity Support May Moderate."


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