World Market Entered Bear Phase
Are we heading towards a double dip recession?
Stocks fell
today pushing the MSCI All- Country World Index of 45 nations into a bear
market for the first time in more than two years, after the worsening
European debt crisis and threat of a U.S. recession erased more than $10
trillion from equities since May.
The MSCI
index, which slipped 0.3 percent in Hong Kong today, has lost more than 20
percent since peaking on May 2, meeting the common definition of a bear market.
It tumbled 4.5 percent to a 13-month low of 277.38 yesterday. The MSCI
World (MXWO) Index of shares in developed nations also fell into a bear market
yesterday, plunging 4.2 percent. The MSCI Emerging Markets Index reached the 20
percent threshold on Sept. 13.
The world is poised for
a financial crisis, Mohamed El- Erian, chief executive officer of Pacific
Investment Management Co., said in Washington yesterday. Finance chiefs
from the Group of 20 nations pledged late yesterday to address “heightened
downside risks” to the global economy, echoing language used by the Federal
Reserve on Sept. 21 when it announced a $400 billion plan to spur growth as the
recovery from the worst contraction since the Great Depression falters.
The market is pricing
in a recession. “Stocks are looking cheap, but it will take a lot of courage to
believe that. Things could get worse. The risk of a sovereign-debt default in
Greece is the most significant concern.”
The MSCI All-Country
World Index has retreated 19.8 percent since July 22. It fell
after Standard & Poor’s cut the U.S. credit rating following
a debate over raising the nation’s borrowing limit, speculation Greece will
default intensified, and Chinese inflation accelerated to a three-year high.
The slump pushed the price-earnings ratio for the index down to 11.4, the
lowest since March 2009 and 46 percent less than the 16-year average, data
compiled by Bloomberg show.
The Standard &
Poor’s 500 Index extended its drop since its peak on April 29 to 17 percent.
The gauge has retreated even as analysts raise projections for 2011 profit to a
record $99.34 a share this year from $98.73 on April 29.
Benchmark measures for
five out of 24 developed markets haven’t posted a 20 percent slump from their
highs: the U.S., U.K., Canada, Singapore and New Zealand. Eight
out of 21 developing nations aren’t in bear markets, including South
Africa. The MSCI Emerging Markets Index has retreated 27 percent since its 2011
high on May 2.
The 15 national stock
gauges with the biggest losses since the MSCI All-Country World peaked on May 2
are for European countries. Greece’s ASE Index has lost 42 percent, Italy’s
FTSE MIB Index has plunged 40 percent and Hungary’s Budapest Stock Exchange Index
has retreated 38 percent.
Policy makers are
“committed to a strong and coordinated international response to address the
renewed challenges facing the global economy,” G-20 finance ministers and
central bank governors said in a previously unplanned statement in Washington.
Many urged Europe to implement a July promise to expand the powers of a rescue
fund.
The Euro Stoxx 50 Index
has tumbled 28 percent since July 22 as Greece edged closer to defaulting on
its sovereign debt and the cost of insuring western European countries’ loans
rose to records. The MSCI Asia Pacific Index has fallen 19.7 percent since its
2011 high on May 2.China’s Shanghai Composite Index has tumbled 23 percent
since its peak in November, and Japan’s Topix has slumped 25 percent since
April 2010.
Europe is going to
continue to unwind and eventually end up badly for the global economy, There
are so many questions, so many uncertainties.
The 20 percent decline
in global equities ended the bull market that began in March 2009. The MSCI
All-Country World Index climbed as much as 107 percent during the rally. The
measure avoided a bear market in 2010, when it fell 16 percent between April 15
and July 5. The index rebounded after Federal Reserve Chairman Ben S.
Bernanke foreshadowed $600 billion in bond purchases meant to prevent deflation
and stimulate growth at an Aug. 27, 2010, meeting in Jackson Hole, Wyoming.
Financial stocks, which
posted the biggest losses in the last bear market, are leading declines again
amid growing concern that European banks will have to write down their holdings
of government debt. Banks, brokerages and insurers in the MSCI All-Country
World have collectively lost 31 percent since May 2.
Financial companies in
the worldwide index sank 77 percent during the last bear market as government
bailouts rescued the biggest U.S. banks from collapse and Lehman Brothers
Holdings Inc., once the nation’s fourth-biggest securities firm, filed the
nation’s largest bankruptcy in September 2008.
More than $37 trillion
was erased from global equity values in the previous bear market that lasted
for 16 months after the MSCI All-Country World peaked on Oct. 31, 2007. The
index fell as much as 60 percent amid the first global recession since World
War II and more than $2 trillion in losses and write downs at financial
companies worldwide after housing prices dropped.
We could be on the eve
of the next financial. We shouldn’t be because there are things that could be
done to avert it, but they haven’t been done. There are no signs that the
authorities are going to do them. Perhaps government has not yet learned from
its previous mistake or they fail to understand the depth of the ongoing crisis.
If no steps are taken to boost the economy the world will sink into another
recession in next 6 month and this one is going to be far more catrostropic
than that of 2008.
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