That Fragile Recovery

It didn't take much. The news that the state of Minas Gerais in Brazil--a region few U.S. investors could find on a map--was balking at government austerity measures sent markets tumbling on Jan. 12. The next day, despite assurances by President Fernando Henrique Cardoso that Brazil wouldn't let a provincial default bust the national budget, the government bowed to the inevitable. The head of the central bank resigned, and Cardoso announced that Brazil would allow a controlled devaluation of the real, which promptly dropped 8%. Once again, the world was reminded that the recovery from the emerging-markets crisis remains fragile.

The good news is that after repeated scares, the markets weren't badly rattled by the Brazilian meltdown. The flight to quality that had suddenly shaved the yields on U.S. government securities just as quickly eased, relieving fears of a return to the liquidity crunch that threatened global recession last fall. And stocks in the U.S. bounced back from what could have been an ugly sell-off. The Dow Jones industrial average closed on Jan. 13 off 125.12 after plunging 261 points early on, while the NASDAQ recovered from a 100-point fall to end the session down a mere 3.94.