Last week’s global sell-off, the worst since January, had all the features that make such market events both frightening and exciting for investors. It serves as a reminder to policy makers of the latent threats to financial stability, and the implication this carries for growth and jobs. It also provides insights for the more bumpy road that lies ahead.
The sell-off was sharp, sudden and generalised. In just a few days the downturn erased the year-to-date gains for major US equity indices, with virtually every segment – both large and small – experiencing significant losses. To add insult to injury, conventional correlations among asset classes broke down as the spillover of the equity market correction spread beyond corporate credit. Commodities also sold off, as did the safest of all havens, German and US government bonds. Well-diversified asset allocations did little to mitigate portfolio risks.
Rather than being driven by a single factor, the correction reflected the cumulative impact of multiple causes that markets could no longer shrug off given high valuations and unbalanced investor positioning. They covered geopolitical, financial, economic and policy factors.