Market experts are never short of explanations for major moves in share prices. But even the most ingenious will be hard pressed to explain the ups and downs of recent days. It was a case of "what a difference a day makes" as the Dow Jones index followed Monday's collapse with an extraordinary rally yesterday. And who knows what today will hold?
Events in the Far East have triggered the latest market crisis but are not its only cause. And while the impact on the international economy is far from clear, it should not be too severe unless a further sustained downward spiral in prices emerges.
The Hong Kong market has been the catalyst for the latest turmoil. Investors have been selling shares in that market in the belief that the Chinese authorities will eventually bow to pressure and devalue the Hong Kong dollar by breaking its link with the US dollar. The Hong Kong market wobbled severely last week and finally collapsed early yesterday in the wake of Wall Street's dramatic slide.
There are reasons why events in Asia would affect markets in the West. For example, many of the big computer stocks worst hit in recent days count Asia as one of their most important markets. And fears lurk in the background that the upheavals in all the Asian markets in recent months could herald a wider economic downturn in that region, which would also pull in Japan.
These fears, however, must be put in perspective. The combined output (GDP) of the biggest five ASEAN economies plus Hong Kong is just $830 billion, one-fifth of Japan's GDP and one-tenth the size of the US economy.
True, the region, even excluding Japan, is a major growth market for multinationals in the West. But this alone does not explain the extent of market moves of recent days.
What has happened is that the events in the Asian markets have focused the attention of investors on an issue which had been in the back of their mind for some time: are share prices too expensive?
International markets have had an extraordinary bull run this year, and gloomy forecasters have warned that the values of many shares have simply risen by too much.
The sharp rise and fall of the Dow Jones index suggests that some investors believed the theory that shares were overpriced, but that others did not and stepped in to buy yesterday in the belief that prices were now looking cheap.
What happens next? The sharp rise in the US market last night will go a long way to calm nerves in Europe today, and some recovery in prices can be expected. But all eyes will again be on the performance of Asian markets overnight. And a period of highly-volatile trading in international markets may lie ahead.
The impact of falling stock markets on the overall performance of the international economy has long been a point of debate. Certainly, a sharp fall in share prices can hit confidence and can directly reduce the wealth of people's assets. But it is worth remembering that the 1987 market crash did not lead to a major global recession as international central banks eased interest rates and confidence quickly recovered.
Indeed, a fall in stock markets may prove a blessing in disguise for authorities in the US and the UK given the warning by the International Monetary Fund last month that strong economic growth and a lack of spare capacity could pose an inflationary threat.
Lower share prices make consumers poorer and make it more expensive for companies to raise money. This in turn should depress retail spending and reduce business investment, an outcome which the US Federal Reserve and the Bank of England might otherwise need to bring about by raising interest rates.
AFTER the 1987 market crash, the authorities reduced interest rates, fearing that people's response to the decline in their wealth could slow the economy sharply. Perhaps more important, they were also determined to ensure that the financial system had enough liquidity to continue running smoothly.
"Unlike many uncertain situations that have confronted monetary policy, there was little question that the appropriate central bank action was to ease policy significantly," Mr Alan Greenspan, the US Federal Reserve chairman, said recently.
Economists do not expect cuts in interest rates now, although the odds against an early tightening of policy in either the US or UK appear to have lengthened. The 1987 crash did not slow the US economy by as much as economists and policy-makers feared and, so far at least, the percentage fall in share prices this time has been much smaller.
The impact on economic activity of lower share prices would vary from country to country. Households in the US and France hold much more of their wealth in shares than the Italians, Germans or Japanese. UK households are also relatively exposed to the stock market, although many of their assets are in pension and insurance funds and unit trusts.
And what of the Irish economy? Share ownership in Ireland has become more common with the flotation of groups such as the Irish Permanent and the Norwich Union. And many people have an indirect interest in the market through a pension fund or unit trust. But overall the amount of wealth in Ireland directly tied up in the stock market through share ownership is relatively low.
If yesterday's 7 per cent reduction represents the worst of the decline, then it will no more than tweak the tail of the Celtic Tiger.
Of course, we cannot know what lies ahead in the markets. Further turbulence could yet knock on to the performance of the international economy. And as an economy highly exposed to international trends, Ireland's performance is bound to be affected if global growth slows.
However, for the moment investors will hope that what we have seen is, in market jargon, a "correction" in share prices and not the start of a major crash.
One reassuring factor yesterday was that investors did not appear to panic, as they had in 1987. Fingers are now firmly crossed in investment houses around the world that last night's Wall Street bounce may signal the beginning of the end of the latest market scare.
Additional reporting Financial Times Service
