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A bull styrofoam figure is pictured in front of the DAX board at the Frankfurt stock exchange in this September 16, 2008 file photo.


After flirting with disaster for months, increasingly volatile markets embraced it with open arms last week. There seemed to be no single reason to turn a steady stream of departures from global equities, commodities and other riskier assets into a raging flood.

True, U.S. economic soundings have grown weaker and the threat of a credit downgrade has turned into reality. But the data have ranged for months from dismal all the way up to lacklustre. And corporate profits, long held up by market bulls as proof a strong U.S. recovery is at hand, continue to sail along. China is still growing and shopping for resources. Washington's bickering blusterers finally got around to raising the debt ceiling; and Greece managed to stay out of the headlines for most of the week.

Yet jittery investors appeared to decide, en masse, that they were not going to stick around long enough to suffer through a repeat of the Great Collapse of 2008. If the world was going to sink back into financial and economic chaos, it was going to do it without their money.

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In a single week, the benchmark S&P 500 erased all of its gains for the year and officially joined the leading emerging market index in correction territory (a drop of 10 per cent or more from recent highs). Canadian and European stocks also suffered their worst drubbing since the darkest days of the 2008-09 global slump. Since late July, nearly $5-trillion has been wiped off the value of global equities. Even gold, the oldest of refuges from economic and financial storms, slid late in the week, as investors sought cash instead.

Wall Street's perpetual bulls haven't given up hope of turning this negative sentiment around. Leading bank strategists, who can make a leaky tub sound like a sleek racing yacht, expect a rebound in the S&P of 17 per cent by the end of the year, according to a Bloomberg survey. Their siren song: "Hey, stocks are cheap. This is a great opportunity to jump aboard."

Well, perhaps not just yet.

"As markets get too negative, we'll probably start seeing it as a buying opportunity," said Roger Beauchemin, president of Toronto-based investment manager and pension fund adviser McLean Budden. "We're not there yet. But I'd say we're approaching that. It's been pretty dismal."

Mr. Beauchemin notes that nothing new has happened to alter his firm's basic investment outlook or its attraction to large-cap value stocks. "This is going to be a sub-par recovery for an extended period of time. We're confident that we'll muddle through this, but it will be a long workout."

As for those big-cap plays, he notes that "typically, they've been very cheap. The problem for us is that they've remained cheap. … That's why you never get too smug. When you do well, the market beats you back into submission."

A similar frenzied flight to safe-harbour Treasuries and other low-risk assets occurred last year, as investors grew increasingly restive over Europe's sovereign debt woes, stubbornly high U.S. unemployment and fears that efforts to tamp down inflation would hit the fast-growing economies of China, India and other parts of the emerging world.

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"There was pent-up enthusiasm, and that got overextended," Mr. Beauchemin says. "All of a sudden people got defensive and then it went the other way. And that's why it's such a manic market. It swings very violently. Sometimes it's day to day, and sometimes it's week to week."

But to borrow a well-worn expression, what if this time it's different?

The realization is slowly dawning that the stumbling U.S. economy may be in no shape to face a difficult future without further injections of government stimulus or more central bank pump-priming. Neither course seems likely, now that Washington has embarked on a mini-austerity kick and the Republicans are still busy trying to pin the blame for a faltering economy on President Barack Obama.

And if investors thought the Europeans were finally getting a handle on their debt crisis, they needed only to listen to European Commission president José Manuel Barrosso, who pulled no punches last week in assessing the deteriorating situation. He warned bluntly that the €440-billion rescue fund approved by European leaders last month has neither the capital nor the capacity to ease fears in the bond market that a fiscally challenged Italy or Spain could bring down the entire euro edifice.

As key problems remain unresolved and economic conditions deteriorate further, you can expect to see something like the following headline, Policy Makers Fiddle While Markets Burn, crop up again in the waning days of this long hot summer of discontent.

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About the Author
Senior Economics Writer and Global Markets Columnist

Brian Milner is a senior economics writer and global markets columnist. In a long career at The Globe and Mail, he has covered diverse business beats, including international trade, the automotive industry, media, debt markets, banking and the business side of sports. More

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