The month-long slide in global stocks has wiped out at least $2 trillion in wealth, leaving investors few alternatives to preserve their holdings aside from bonds and money markets.
Investors have been dumping stocks, commodities and emerging market assets on growing concerns that economic growth will suffer from higher inflation and interest rates.
"It is essentially one consistent story worldwide, starting here in the U.S. There is a fear that the Fed's repeated commitment to limiting inflation demonstrates a willingness to risk economic activity," said Christopher Low, chief economist at FTN Financial in New York.
Stock markets have been punished since the U.S. Federal Reserve raised interest rates for 16th time in a row on May 10 and issued a hawkish statement saying it may need to do so again to fight inflation. Investors had expected some sign of an end to the tightening cycle.
Since early May, Brazil (EWZ) dropped 32% from $47 to $31.92; Honk Kong (EWH) dropped 15.97% from $14.77 to $12.41; Malaysia (EWM) dropped 13.91% from $8.12 to $6.99 and Singapore (EWS) lost 17.43% from $9.75 to $8.05. Yesterday alone Columbia lost 9.8%, Russian lost 9.4% and India lost 4.4%.
Here is a more in-depth reason for the sell-off
Global fund managers have slashed their expectations of economic growth and are shifting investments out of emerging markets into more resilient U.S. stocks out of fear that central banks will remain hawkish on inflation, according to a survey released Tuesday.
About 61% of respondents to Merrill Lynch's June survey said they expect the global economy to weaken over the next 12 months, compared with 43% of respondents in May.
Merrill Lynch described the events of the past month as a "negative growth shock." The company said growing inflation risk may have prompted fears that central banks will engineer a period of below-trend growth to be sure that inflation doesn't accelerate.
US markets have not been immune to this sell-off. Since early April, the Dow (DIA) has dropped 8.18% from $116.51 to $106.97, the S&P 500 (SPY) has lost 7.71% from $132.80 to $122.55 and the NASDAQ (QQQQ) has lost 13.47% from $43.05 to $37.25.
As the article states, this meltdown has hit all the markets.
Gold for August delivery plunged $44.50, or 7.28%, to close at $566.90 an ounce. It was the worst single-day percentage decline for gold since January 1991, according to brokerage Miller Tabak.
The selloff was even more pronounced for silver, with the July contract losing $1.44, or 13%, to $9.62 an ounce. Copper for July delivery dropped 21 cents, or 6.8%, to $3.01 a pound. Both routs were the worst percentage declines in more than a decade.
The pain that has befallen commodities since mid-May has now lopped off 21% from the price of gold, 28% from the price of silver and 25% from the price of copper.
Take a look at these charts: copper, gold, and silver. All three markets have benefited from speculative excess; they are the early 2000s version of the late 1990s dot-com bubble. The underlying reasons for some of these market's appreciation is sound. As China and India emerge as up and coming economies, they will need raw materials to convert into finished goods. Increased demand = increased price. However, as these markets appreciated they attracted speculative money which exacerbated their upward moves.
Here's the short answer about what has happened:
"The specialty retail funds that were the late comers and helped drive metals to their highs [last month] are now all trying to get out at the same price, at the same time, and through the same door."
There are two ways of looking at this sell-off. There is no way to know which one is correct until some time has past. This could be a painful correction to a bull market. If that is the case, expect the markets to rebound within the next few months. Or, it could be the beginning of a big global slowdown. If this is the case, there won't be a rebound. Instead, expect a general trading malaise to persist for the next bit of time.