World, 1; Armageddon, 0

Once you survive a global economic meltdown, nothing else they throw at you seems all that troubling.

That may be the best way to sum up why stock markets worldwide performed so well in the first half of 1999--and why Wall Street is viewing the approach of the new millennium with such apparent optimism.

The Dow Jones industrial average, the best-known U.S. stock index, rocketed 19.5% in the first half, continuing the 1990s string of heady double-digit gains that many U.S. investors have probably come to believe is their birthright.

By last Friday, two days into the new quarter, the Dow was at a record high of 11,139.24--and 24% above its level one year ago, 45% above its level two years ago and 97% above its level three years ago.

More significant than the Dow’s continuing juggernaut, however, was what happened in other stock markets in the second quarter and first half. Share prices zoomed across Asia, for example, lifting many of those markets out of the deep depressions into which they had tumbled in the last two years.

And here at home, what had been largely a blue-chip bull market since mid-1998 broadened significantly to include long-forgotten smaller stocks, heavy-industry shares, real-estate-related stocks and others.

Why did markets turn so ebullient--in a six-month period when U.S. interest rates were rising, Europe’s economy struggled and crude oil prices jumped 63%?

Many investors worldwide have the sense that they survived something awful over the last 12 to 24 months. And, in fact, they did.

While journalists may overuse words like “meltdown,” the scary truth is that many aspects of the world economy did indeed melt down, or threatened to, between mid-1997 and last January: East Asian currencies and stock markets; Russia’s economy; key commodity prices; one of the biggest U.S. “hedge” funds; Brazil’s currency; and, arguably in the near-miss category, the U.S. political system amid the first impeachment of a sitting president since the 1800s.

By last fall, as many economists talked openly about the rising risk of a new global deflation/depression on the scale of the 1930s experience, Federal Reserve Chairman Alan Greenspan became worried enough to cut U.S. interest rates three times in rapid succession--even though the U.S. economy itself showed few signs of succumbing to the global turmoil.

“We were close to the abyss at the end of 1998,” International Monetary Fund Director General Michel Camdessus said Monday. The occasion for that comment: He announced that the IMF was raising its estimate for real global economic growth in 1999 to 2.5% or more, up from a 2.3% forecast in April. He also said the IMF’s forecast for 3.4% growth in 2000 now seems much more likely to be achieved.

Whether the Fed’s move was the key to turning the tide in many battered global markets, or whether that tide would have turned anyway, we may never know. What we can deduce from the stunning stock market gains in much of the world so far this year is that confidence in the future is rising--because stocks, after all, are essentially a “call” option on the future.

Jeffrey Applegate, investment strategist at Lehman Bros. in New York, looks at the U.S. stock market today and the improved outlook for the global economy and comes to this basic conclusion: “A year from now, corporate profits ought to be higher than they are today.”

If investors need a simple reason to stay in stocks, that’s a pretty good one, he figures.

What about higher U.S. interest rates? Stock markets have coped so far; it’s a far better problem to have than collapsing rates tied to collapsing economies, investors seem to be saying.

What about year 2000 computer bug fears? Certainly, there’s a lot of time between now and Jan. 1. Some investors may indeed become spooked by fears that enough computers will crash on or around Jan. 1 to cause a worldwide panic.

Applegate’s view, however, reflects what a computer consultant told him recently, which was that “80% of Y2K problems are going to be fixed in 72 hours” after Jan. 1 (a weekend during which most people won’t be working anyway, except perhaps on their hangovers).

As long as the financial system is largely still intact, investors who suffered through the Armageddon threat of last fall may find minor Y2K problems a nuisance at worst, some Wall Street optimists say.

In any case, for the professional money managers who control the bulk of stock assets worldwide, any portfolio shifting they feel the need to do in anticipation of the Y2K concerns or other Jan. 1-related worries will be done this summer--well in advance rather than at the last minute.

“If you’re going to do anything, it’s going to be in the next three to four months,” says Charles Crane, strategist at $60-billion asset Key Asset Management in Cleveland.

That could be a recipe for significant market volatility in the near term, Crane warns.

He also raises a concern that remains perhaps the most troublesome for U.S. stocks in the long run: the sky-high price-to-earnings ratios on many big-name blue chips.

There was a fracture in the blue chips’ armor in the second quarter: While most stocks advanced, some of the most highly valued growth stocks tumbled--almost the lone equity casualties of the higher U.S. interest rates that accompanied the growing optimism about the world economy.

Crane still considers many of those blue chips overpriced. “If all I could buy was the top 50 stocks in the Standard & Poor’s 500, I wouldn’t be very happy,” he says of the U.S. market.

But his solution, and that of many other U.S. investors in the second quarter, was to branch out and look for better value in the thousands of stocks that make up the broader market.

They must have found some, given the sharp advances in many small and mid-sized stocks.

Ditto for gains in Asian and Latin American markets.

But if the optimists are in control of stock markets today, many also are well aware of the risks.

Asia’s recovery could wither, and the money that was so quick to move into those stocks this year could pour out--par for the course in emerging markets. Russia could suffer a new political crisis. Europe could slide into recession.

As the accompanying table shows, for almost every positive thing you can say about stocks looking into the next millennium, there is something negative you could say as well.

One might also ask, however: When is that not the case?

Even Wall Street bulls concede there is a big risk that many equity markets are in, or approaching, mania stage--foremost among them the U.S. market.

“Stock market mania is no longer a subplot in this economy. It is the central story,” argue economists David and Jay Levy of the Levy Institute.

What if, they ask, the old boom-bust cycle of much of the post-World War II era revives: In other words, global growth accelerates, inflation resurges, the Fed steps in to raise interest rates several times, stocks plunge, and the economy begins to careen toward a marked slowdown or recession?

How much more would the U.S. economy suffer without the “wealth effect” of soaring stock prices?

We’ll probably find out someday. But for now, after the financial turmoil last year that the IMF’s Camdessus called the worst in 50 years, investors may be forgiven if they can see only the good news in roaring stock markets and the prospects for stronger worldwide growth.