Why a Strong Economy Sends Markets Reeling; Wall Street Investors Play By Different Rules, Experts Say
Once again yesterday Wall Street investors ran for cover on the news that things were looking up for American workers and consumers. Even with the stock markets closed and many traders off for the Easter weekend, bond prices fell sharply, setting the stage for stocks to follow suit when the markets reopen on Monday.</br></br>This disconnect between the markets and the economy is rooted in the perennial fear that strong economic growth will lead to inflation and higher interest rates, the things investors fear most.</br></br>"The fundamentals of the markets these days are not the inflation rate or the unemployment rate but the underlying architecture of speculation," said Jim Grant, editor of a widely read newsletter on interest rates.</br></br>The rising employment and brisk growth that the economy has generated since last summer already was reflected in the strong run-up in stock and bond prices through last year. What the markets may be doing now is reflecting a widely held view that inflation and interest rates will be higher, and economic growth will be slower, in 1995.</br></br>Pessimists see an economy that has nearly reached full employment, where auto plants are running at full capacity and whose prices for raw commodities are beginning to rise. By traditional standards, these are indications that wages and prices soon will begin to climb, pulling with them interest rates. Pessimists fear high rates will choke off the recovery and send stock and bond prices into the cellar.