Watching global stock markets drop has been, at best, unnerving. From their recent peak on February 20, American stocks last week lost about $900 billion in value, or almost 5%, Wilshire Associates reports.

With unemployment at 4.6%, the American economy can hardly be described as sickly. It’s not just America. “We’ve had the best global economic growth in 25 years,” economist of Macroeconomic Advisers, Larry Meyer, says. Yet, stock markets have dropped worldwide, and business and consumer confidence are wobbly.

What explains the contrast?

Well, stocks could be signaling a bleaker future. The American economy will slow or even slip into recession; indeed, the former Federal Reserve chairman, Alan Greenspan, raised just that possibility last week. Profits will be weaker than expected, therefore, stocks drop in anticipation.

Up to a point, slower economic growth is precisely what the Federal Reserve intends. Through higher interest rates and weaker demand, it wants to nudge down inflation by creating more price and wage competition.

But, of course, a desired slowdown could become an undesired recession. Housing is already in a deep slump. Homeowners can borrow less against swollen house prices, which are generally now either stagnating or falling. Consumer spending, more than two-thirds of the economy, may weaken.

Or global financial markets — for stocks, bonds, foreign exchange, and other securities — may simply be misbehaving.

It’s crowd psychology.

Investors sell because they think others will sell, even though American stocks don’t appear to be wildly overvalued, as they were in the late 1990s. Consider. Since World War II, the price-to-earnings ratio of stocks in the Standard & Poor’s 500 index averaged 16.15. That means that stock prices averaged 16 times profits, or earnings.

At the end of January, the P/E was 16.74, hardly out of line. It was also well below the average, 22, for the past 20 years and the peak, 47, in 2001, despite big gains in stocks since mid-2006. At their recent peak, stocks were up about 20% from their 52-week low point.

It’s also said that the sell-off demonstrates China’s growing financial significance. True, the worldwide stock slide started in China last Tuesday, when its market lost almost 9%. But China’s market is too small to matter much in a global context. At year-end 2006, the value, or “capitalization,” of all China’s stocks was $1.4 trillion. That was less than 10% of America’s market capitalization.

In 2006, China’s market rose 130%; it seemed due for a drop. Conceivably, the decline foreshadows a slowdown in China’s economy, which has been growing 10% annually. But it’s doubtful that enough Chinese own stock for losses to hurt the economy significantly. “The markets are not telling us anything about the state of the Chinese economy,” UBS’s chief Asian economist, Jonathan Anderson, writes.

So: we don’t really understand what’s happening.

For Americans, what’s curious is that people seem to feel more economically insecure even though the economy has become more stable. Since 1982, there have been only two recessions, lasting 16 months.

In the past 10 years, unemployment has averaged 4.9%; in the 1970s, the average was 6.2%. Yet in 2006, only about half of workers were satisfied with their job security, reports a poll from the Conference Board. In 1987, when unemployment was higher, about 60% were satisfied.

One explanation of the paradox is that the uncertainties and insecurities that assault workers, investors, and firms actually foster overall economic stability.

There are constant upsets — business expansions and closures; greater competition from emerging technologies and foreign economies; shifting prices for stocks and bonds. These put people on edge. But many small adjustments may smooth out the business cycle. They may minimize deep recessions, stock crashes, and financial panics.

By this view, recent stock losses might be healthy. To many observers, the global financial system had become dangerously speculative. The vulnerabilities lay less in stock prices than in low interest rates on credits to riskier borrowers: emerging-market countries, weaker corporations, and American home buyers with “subprime” mortgages.

After large losses in subprime mortgages, investors are growing more cautious. Stock prices took a hit because there was a general retreat toward safer investments — Treasury bonds, cash.

It’s comforting to think that markets usually self-correct in time to avert broader economic havoc. But sometimes markets go to extremes — and stay there too long. Stocks became hugely overpriced in the 1990s. Big imbalances now in global trade and capital flows might portend deeper instability.

What’s unsettling is that global financial markets seem increasingly synchronized. “Everyone’s investing everywhere,” chief economist of Standard & Poor’s, David Wyss, says. “All the bets seem to move in the same direction.” And that means bad news — like good — could be contagious.