(April 7) – Is the worst of the market adjustment over? Can we expect markets to be more stable? Marie-Josée Kravis, a fellow of the Hudson Institute, asks those questions in today’s Financial Post in an article entitled, “Markets feel the stir of a new economy.” And the answer, says Kravis, is, “Probably not. The transformations that are occurring [in the economy] are too profound and insufficiently understood to instill calm in financial markets.”

“The future just isn’t what it used to be,” Kravis writes. “For months, stock market investors disregarded traditional measures of business performance such as profits and earnings and placed their bets on the future of high technology and the Internet. Nasdaq stocks traded for an average 188 times profits, whilst investors thrashed ‘old-economy’ companies even when they met earnings forecasts and delivered growing profits.

“For months also, market observers commented on stratospheric valuations and predicted a market correction. But after growing 86% in 1999, the Nasdaq index continued to climb by 24% in the first quarter of this year. Then what many predicted happened — the market dropped. The ride down for both the Nasdaq and the Dow Jones was so abrupt and so harrowing that it caught many by surprise …

However, Kravis argues, “Nothing fundamental had changed. There were no signs of a slowdown in Internet and technology usage. Last-quarter U.S. GDP growth had been revised upward to 7.3%. Oil prices were beginning to weaken. …

“But the market was spooked. Fear of a free-fall combined with apprehensions that reduced stock-market wealth would dampen consumer spending and economic growth. Inevitably, margin calls added to the market’s downward spiral by triggering the sale of shares …

“In the policy arena, we have yet to come to grips with the rules of a knowledge-based economy … Politicians, bureaucrats, and regulators have yet to catch up with this new environment … In the private sector, many investors have yet to realize that trees do not grow to the sky …

“There will be more bumps along the road, and many companies will disappear,” Kravis concludes, “but the genie is out of the bottle. The Internet, high-tech and the knowledge economy are real, and we just have to learn to adjust to the many more changes and upheavals ahead.”