In May, the combination of strong global equity markets and low volatility that had endured for three years came to an abrupt halt. With nervousness in financial markets continuing, it pays to take a step back and consider the performance of the equity markets in the context of the last 18 months.
The markets that went up most in 2005 have suffered the biggest peak-to-trough correction this year. And although higher-risk assets such as emerging market equities fell most from their peak (by 24%), safe-haven assets like gold declined almost as much (22%) and yet lower-quality corporate credits barely wobbled. Now most regions have recovered sufficiently from their lows to bring year-to-date performance close to the flat line.
Globally, what triggered the sell-off was the recent acceleration in US core inflation above the Federal Reserve’s “comfort zone”. In just a few weeks, investor expectations have shifted from a “pause” on...
