However shallow or deep this downturn proves to be, it is unfolding according to a fresh set of New Economy rules. Companies that were in favor were wildly in favor. The risk in New Economy investors' enthusiasm is that at the height of the market, every possible piece of good news is factored in. Then when companies whose stock sells at sky-high multiples of their earnings announce even minor setbacks, their stock gets pummeled. In Old Economy days, the stock market was a source of stability.
People see a trend as it's happening and call or click their broker to chase the momentum.
But on the downside, it can turn a minor downtick into a major bloodbath. But today the market's fortunes also influence the performance of the economy to a greater extent than ever. It now helps determine how many toys and cars America is willing to buy. When the market rises, Americans feel wealthy. The rule of thumb is that for every additional dollar in their portfolios, Americans spend another 3 to 5.