We have seen the markets tumble over fear and uncertainty in the economic environment especially in Europe and the US. Markets in the US slipped badly, indicating tough times ahead.

Global equity markets represent true economic picture and future prospect of global economy — they literally reflects economic movement and condition at a global level. It is the confidence in economic activity that perhaps brings rally in markets and any hint of risks in any of the markets, like gold equity, generally leads to sell-off in respective markets.

US Markets registered their greatest fall since March 2009 recently when S&P 500 index fell 4.7 percent, extending losses of 12.4 percent over the previous three weeks. As the concerns became more concrete about the strength of global economy to recover on its own, over-selling hovered over markets.

The current situation in the US and Europe says something different about the attitude of investors, with a heavy drop in Dow Jones Industrial Average (DJIA) of 451.37 point or 4 percent to 10,817 last week, even the cheapest price-earnings ratio fails to lure investors.

The S&P 500 has fallen 18 percent from the almost three year high on April 29 mainly because of growing concern of the Eurozone debt crisis. This decline drove index valuations to a valuation of 12.2 times reported earnings, the lowest level since March 2009.

With weak valuations amid the ailing economic recovery, investors find it attractive to capitalize on the climate, in complete contraction with current conditions in the economy. What generally happens when the economy goes through a rough phase is that stock markets crash unprecedentedly.

In this case while all-time low valuations or cheap PE ratios investors are finding an opportunity to cash in, in  the short term. Warren Buffet’s Berkshire Hathaway inc. accelerated stock purchases on August 8 when S&P 500 plunged its hardest since December 2008. Chief Executive officer of Berkshire Hathaway Warren Buffet said: “I like buying on sale.”

David Joy, a Boston-based chief market strategist for Ameriprise financial inc. said: “We are in a bit of a tug of war.” “One the one hand we have cheap equity valuations and on the other hand we have pressure on banking system and weakness in global economy,” he explained. JP Morgan said that the US may expand less than previously projected in the next two quarters.

Citigroup cut its estimates for the US

The Morgan Stanley Cyclical index of companies most tied to the economy retreated 3 percent, with Caterpillar inc. slumping 4 percent while Ford Motor Co tumbled 3.8 percent and Hewlett-Packard by a whopping 27 percent. Morgan Stanley economists cut forecasts for the global growth this year and said that the US and Europe are dangerously close to a new recession.

Market participants will also be looking ahead to comments from the Federal Reserve Chairman Ben Bernanke at the central bank’s annual meeting at Jackson Hole, United States. A money manager based at Cincinnati Bahl & Gaynor Inc said: “there is nothing Bernanke can do that’s likely to help stocks.”

All this and more makes it believable that markets are desperate to hear good news, hoping that next week’s series of economic reports or company reports can revitalize markets.

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About the author

Muhammed Faraaz
Post-graduate in Economics from India, unfolding complexities and policies. Proponent of Classical Economics.