Stock markets in Britain, France, and Germany hit three-year highs in recent days. The U.S. S&P 500 stock index reached a four-year high. The mid-cap S&P 400 and the small-cap Russell 2000 climbed to all-time historic highs, as did the transportation index and the New York Stock Exchange index.

Following the 9/11 terrorist attack on the U.S., it took the S&P two years to recover its pre-attack level. After the Madrid train station bombings in 2004, it took stocks 14 sessions to recover. But after the London attack, it took only one day for markets to rebound, with substantial gains coming on the following two days.

I have long believed that stock indexes reflect the health, wealth, and security of individual nations. That explains why stock markets are standing tough in the face of al Qaeda’s latest attack. Worldwide investors are telling the enemy they have long-term confidence that the war on terror will be won, just as they believe in the resiliency and flexibility of free-market economies and the outlook for pro-growth policies, which are in action across nations.

Ben Bernanke, the former Fed governor and new chairman of the Council of Economic Advisors, told a Washington group that “We are in the midst of a healthy and sustainable economic expansion.” He’s got that dead right. Besides rising share prices, appreciating real estate and declining unemployment are boosting family wealth and incomes, allowing consumers to withstand higher energy prices. Meanwhile, sales at stores open at least a year are surging at better than 5 percent; corporate profits, which are the lifeblood of business expansion and investor class wealth, have soared to record shares of gross domestic product; and recent surveys by the Institute for Supply Management show both the manufacturing and service economies to be strong.

Though President Bush’s critics will never admit it, his supply-side tax reforms of two years ago are working brilliantly. With new incentives to work and invest, the economy is expanding, the income base is widening, and businesses and individuals are producing an unprecedented surge of tax collections. All this is occurring at lower marginal tax rates. Once again, the Laffer curve is working.

The budget deficit is shrinking to roughly 2.5 percent of GDP in line with the average of the past four decades. As for the claim that trade deficits are bad for U.S. workers, consider this thought from Café Hayek blogger Russell Roberts, a professor at George Mason University: “The U.S. has run a merchandise trade deficit for every year since 1976, trillions of dollars of deficits. And since 1976, the U.S. economy has created over 50 million jobs.”

Wall Street economist Michael Darda points out that non-financial productivity is trending at a 3.2 percent annual rate for the past ten years. If the Fed doesn’t invert the yield curve by tightening too much, U.S. economic growth ought to trend around 4.5 percent from this high productivity base.

President Bush had the right idea at the recent G-8 meeting when he pushed to stop a worldwide carbon tax. Such a tax would have damaged all manner of global economic growth. Hopefully Bush also can stop a China-bashing trade and currency war at home, which like the disastrous Smoot-Hawley tariff of 1930 would undermine economic growth.

I’m not all that confident in Old Europe, but it’s a good bet that flat-tax-type market reforms in Eastern Europe are going to force Old Europe to get rid of their old-style socialist policies. The recent defeat of the European Union constitution, which would have blocked reforms and strengthened central planning by the Eurocrats in Brussels, was a good thing. The pro-American Angela Merkel will soon replace Gerhard Schroeder in Germany. In France, Jacques Chirac has become the lamest of political lame ducks.

But just stop for a second and think of the confidence the global stock markets are showing in the future. Despite the assaults of radical Islamists on free societies, rising equity bourses surely suggest that the U.S.-British-led coalition of the willing is making enormous gains as it strives to defeat totalitarianism and spread democracy and freedom worldwide.

Undoubtedly there will be more heartbreak in the terror war. But the message of the stock market strongly argues that we are moving in the right direction.