Despite a generally strong world economy, stock-market declines
here and abroad this week are confirming a new investor mood that's
focused less on hoped-for highs and more on the downside risks.
Many stock indexes remain up for the year to date, but in the
past month they have shifted sharply downward, led by the emerging
nations that had been posting the strongest gains.
From May 8 through this Monday, for example, the MSCI Emerging
Markets Index has fallen 13.8 percent, the Russell 2000 index of
small US stocks is down 8.7 percent, and the Standard & Poor's 500
index of large US stocks have shed 4.5 percent of their value.
Similarly, a broad index of major foreign stocks, from Europe to
Japan, is down about 5 percent.
Wednesday morning, after sell-offs in China and Japan earlier in
the day, traders pushed the Dow Jones Industrial Average back and
forth across the psychologically important 11,000 mark.
Topping the list of risks is the threat to the overall pace of
global economic growth, as the US Federal Reserve and other central
banks raise interest rates to combat inflation. Some fear that
rising interest rates could cause a recession. Many see that
scenario as unlikely, but still fret that slowing growth could
dampen corporate profits.
"The sell-off in risky asset markets has been global," Richard
Berner, an economist at investment powerhouse Morgan Stanley in New
York, wrote to clients late last month. "Until recently, many
investors were hoping for the Goldilocks scenario of just enough
growth to sustain earnings, credit quality, and brisk demand for
commodities, but not enough to stir inflation and more Fed
The current climate, by contrast, has brought a range of
potential risks to the forefront. Dangers include the possibility of
a sharper-than-expected downturn in the US housing market, a
continued slide in the value of the US dollar, an interest-rate
overshoot by inflation-wary central banks, and some unforeseen
financial crisis in the murky but massive realm of hedge funds.
This doesn't mean that a market meltdown is coming. But it's been
enough to ramp up volatility on trading floors from New York to
In essence, the global economy has entered a phase where its
momentum is harder to read. Many forecasts call for world gross
domestic product to continue growing at a healthy clip of about 4
percent this year. But recent signs in the world's largest economy
are troubling. US inflation is edging up, even as job creation - a
key driver of future growth - faltered in May, according to a report
last Friday. …