Two
Precipitating Factors: The Internet,
the Baby Boom, and Other Events

If the growth of the economy does not in itself justify the increase in the value of the stock market since 1982, then what has changed since 1982 to cause the market to climb? What precipitating factors started this remarkable surge? What, in particular, has happened since July 1997, when the price-earnings ratio passed above its former record high, set in September 1929, and then proceeded to move up by yet another third by the start of 2000? To answer these questions, it is not enough to say that the markets in general are vulnerable to irrational exuberance. We must specify what has changed to cause the market to behave so differently from other times.

Most historical events, from wars through revolutions, do not have simple causes. When these events move in extreme directions, as price-earnings ratios have in the recent stock market, it is usually because of a confluence of factors, none of which is by itself large enough to explain these events.

Rome wasn't built in a day, nor was it destroyed by one sudden bolt of bad fortune. More likely, it owed its fall to a plurality of factors—some large and some small, some remote and some

-17-

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