Why are the markets melting?

Stocks are tumbling at a fast rate around the world. The Dow is down ~400 points at the moment of writing these lines (an improvement from the -500 earlier). Looks like we are in a good old traditional correction. After one of the longest bull market in recent history, we forgot how a correction feels.

Hungry

So why are the world markets falling like a rock? Well fear is dominating investors sentiment and that fear derives from uncertainty. Since uncertainty is the seed of fear and chaos, where is it coming from? None of following should be surprising to you but here are the top concerns that are behind this extended selloff:

  • Oil: The speed and magnitude of the decline in oil. Crude is at a 12 year low and is now trading below $30. The selloff comes down to two simple Economy 101 forces: Increased supply and decreased demand. Lower oil prices also cancel plans for capital spending. This is a source of major business spending and equities takes cue from that.
  • The withdrawal of Fed’s stimulus. This was a major leg of the stool on which the global recovery was resting on. Now the Fed is in tightening mode.
  • China slowdown fears. Nobody knows what’s going on in China, the 2nd largest economy in the world. The lack of clarity is a source of fear and adds to the volatility. People who does business in China said that the growth rate is closer to 3% than 6%. Also it seems that the Chinese government doesn’t know how to handle the problem.
  • Europe’s recovery remains to be fragile. At maybe 1% economic growth, it’s not growing fast enough.

These are some of the factors that fuels the selloff. Combine all of that and you are in a major funk. Fear is a very contagious emotion. Fears breeds more fear and that’s how you lose 300-400 points a day.

Bear Market

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