There is an oft used saying - the past is prologue. Accordingly, a look at last year's international equities performance may give a clue to this year's prospects. Most indexes worldwide declined for the second year after the excesses of the pre-millennium run up. There were exceptions, of course. The most notable was the South Korean Kospi, which bounced back over 38 percent in 2001 after losing half of its value in 2000. The Russian, Peruvian and Mexican equities markets all turned in very respectable 2001 increases.

Then there were the disappointments, that is almost everyone else! Like those in the United States, the British equity markets suffered their second successive slump in 2001. All the main indices fell, with the benchmark London FTSE 100 index down 16 percent. It was the first time since 1973 and 1974 that the FTSE has posted back-to-back declines. Europe's major indexes also fell sharply, proving that Europe's markets and economy are not immune to recessions in the U.S. and Japan. The Frankfurt DAX tumbled 20 percent and the Paris CAC sank 22 percent. According to global index provider FTSE, the world equity markets lost 17 percent during 2001 in U.S. dollar terms -- losses that came despite aggressive interest rate cuts by the Federal Reserve and Bank of Japan.

In Asia, things were not much better. In 2001, Japan's Nikkei fell a further 24 percent on top of the preceding year's 27 percent drop as the economy sank further into recession and deflation held on tenaciously. With interest rates at zero and government economic policy floundering, investors had little choice but to bank on exporters to stimulate the economy. The logic is that the United States will be the first to recover because of its proactive fiscal and monetary policies, allowing Japan to export its way out of its ten-year malaise.

Despite the poor U.S. economic performance and the events of September 11, the Dow was one of the better performing market indexes. The Dow fell 7 percent after a decline of 6 percent in 2000. While the Dow's losses were in the single digits, losses in the Nasdaq, feeling the full brunt of the collapse in tech stocks, were well into the double digits. The Nasdaq piled a 21 percent loss on top of 2000's 39 percent drop - even worse than the Nikkei's dismal performance. To be fair this was after the 1999 exuberant run up to the millennium, which saw the Nasdaq soar 86 percent while the Nikkei climbed "only" 37 percent. The Toronto composite 300 index was dominated by the rise and fall of Nortel. While it managed to hold onto a positive finish (up 6.2 percent) in 2000, it lost 13.9 percent in 2001. Its 2001 performance closely paralleled that of the FTSE 100.

Bottom Line
One is struck by the how the stock indexes parallel each other's performances. One of the more recent explanations for the close relationship between indexes is that stock markets are increasingly being driven by global factors. Traditionally, investors have sought to reduce risk by diversifying overseas. Wider investment flows, cross-border mergers, expanded trade, all helped along by the technology boom, appear to have increased the importance of global forces at the expense of national ones.

However, local data and events are still important. The United States was the 1990s' worldwide growth locomotive. And while market exuberance can be infectious and spread worldwide, falling markets can be more contagious as bad news always spreads faster than good. But the bottom line is that people still react to what is happening around them and that means local events do matter. For a consumer to spend, his job, income, and spending are ultimately affected by local conditions. And these local conditions continue to provide the platform for investment.

Stocks generally anticipate economic improvement by about six months, so the more positive fourth quarter could be interpreted to mean that the second half of 2002 will show improvement.

Anne D. Picker, International Economist, Econoday