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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Soon after the so-called end of the depression period in the global economy, at a time when the global economy started a weak recovery, a more complex economic phenomenon emerged as the next bellwether to world economy.

Since 2009, the European economy has been struggling with slow economic growth rate and indomitable debt crisis that led to political disturbance in some countries of Europe. The crisis has dragged these economics back in to recession.

Years of heavy, unprecedented government spending in Greece and other countries of the Euro zone, led governments to go beyond available budgetary resources, and rely solely on borrowing to finance expenditures. This produced a series of risks to these economies and financial systems as a whole.

Leading economists warned that European debt crisis could spread across the continent in a major blow to the single currency system; further, the International Monetary Fund said turmoil in Greece, Ireland and Portugal may engulf the wider Euro zone despite billions of Euros already spent in emergency aid so far.

In an attempt to reduce dangerously rising levels of debt and forced and deep painful cuts in public expenditure — less government spending — drove up unemployment and put several nations back into recession. Many economists around the world claim that such immediate spending cuts are self-defeating in nature.

After much struggle in 2010 the EU and IMF combined to offer Greece a bailout package of 110 Billion Euros, followed by a broader contingency fund of 500 billion Euros. But the new loans came with the effect of austerity measures that apparently demanded a ceiling on public expenditure leading to widespread protests and political uncertainty in Ireland and Portugal.

Recently, the prime minister of Portugal said the government decided to ask the European Commission for financial help. According to economists, Portugal needs financial aid to the size of 80 Billion Euros.

After Greece and Ireland, Portugal became the third financially troubled country in the Euro zone to request financial assistance from Europe’s Bailout Fund and the IMF.

The era of financial trauma in the Euro zone began in December 2009, after newly elected Greek Prime Minister George Papandreou announced that his predecessors had hidden the actual size of the massive budget deficit. In a bid to regain the lost confidence in the region, the IMF urged European leaders to fix the banking problems and slash national deficits that have undoubtly led to stringent austerity measures.

Economists also say that strong policy responses so far that led to the weakening of Greek, Irish and Portuguese economies have contained the fear to some degree. However, markets are uncertain about the Greece capacity to pay back its debt of 285 million pounds, or $463.95.

As of now, Greece has more than 300 billion Euros of debt constituting to a sum of 140 percent of its total GDP. Recently, the EU and IMF Agreed to a 110 billion Euro bailout. According to Jose Manuel of the European Central Bank, a default would have extreme adverse consequences for the Greek economy.

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