We All Fall Down – Stock Markets Tumble

Stocks markets in the US, Europe, South America and the Asia-Pacific are all tumbling, fueled by fears of a global recession.

The outlook for global economic growth appears dim, due to bad news from a number of fronts. In the US, factory activity in the Mid-Atlantic region fell, while US home sales unexpectedly fell in July and new claims for jobless benefits grew more than expected. In Europe, fears that the debt crisis could infect the region’s financial system resurfaced, also US federal and state regulators’ scrutiny of the US arms of Europe’s banks and some European banks’ higher interest rates for US dollar loans, led to worries about spillover of Europe’s debt crisis into the US banking system. The decreasing global consumer demand and markets contagion led to other markets’ falls.

As investors were driven away from equities and corporate bonds, they were moving into safe-haven gold and core sovereign bond investments, which sent gold prices soaring to a record-high of US$1,853.20 an ounce, and pushed US Treasuries yield down near to three-year lows of 2.083%. Meanwhile, crude oil prices fell to $82.38 a barrel, falling approx. 6% amid global economic slowdown fears.

At this point, it is tempting to buy into the bear market and for some stocks (fundamentals and/or asset values supporting greater than market caps), one should be careful of not falling into a “value trap” and mistaking cheap stocks whose prices will continue to fall further, as being value stocks. That is because earnings estimates are revised down more slowly in selloffs than prices fall, meaning the earnings in a P/E ratio may be momentarily inflated.

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