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The current stock market crisis has already wiped out more value from the S&P 500 than it did in 2008

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The stock market crisis triggered by runaway inflation has already wreaked more value on US stock markets than the previous financial crisis in 2008. Since the peak recorded by the S&P 500 index on January 3 of this year, North American stocks lost $10.14 billion in capitalization. In the previous bear market, the maximum value destruction (between July 2007 and March 2009) was $8.04 trillion.

To a certain extent, it is normal for newer crises to destroy more value than older ones. Businesses are always making more and worth more because it makes sense that falls are worth more in absolute terms. As a matter of fact, the Lehman Brothers crisis led to a maximum collapse of the S&P 500 (combining the largest companies in the US) of 56%while the North American stock market only shows a correction of 23% this time.

If in 2007 the origin of the crisis was purely financial, with an over-leveraged US economy (think mortgages subprime), on this occasion the main cause of the correction was the Federal Reserve’s reaction to try and raise interest rates control prices. With inflation at 40-year highs, the move was more than necessary.

The previous bear market lasted 20 months. It was in March 2009 that the S&P 500 bottomed and began to climb, later to underwrite the longest bull run in its history. This time the US stock market correction was very abrupt. The S&P’s second quarter is on track to be the second-worst on history with a nearly 19-percent decline%. The worst thing is that it is not yet known if the market has bottomed out.

Strong cut also in Fixed Income

Another major difference between this crisis and the previous one is that diversified investors have been able to cushion falls in equity markets with their fixed income positions during this crisis. However, this time the bond markets are experiencing the worst start to the year in their history. Now, with the Federal Reserve’s recent rate hikes, some bond funds have already begun to post positive returns.

Even if the US economy continues to show signs of strength (full employment and high growth), more and more experts are forecasting a significant slowdown in the third and fourth quarters of the year. The investment bank Nomura assumes that the USA would already be in a recession by the end of the year. The stock market, as has always happened, does nothing but anticipate and discount future events. The Fed needed a recession to fight inflation, and it will have one. The market knows.

The first companies to notice the start of the bear market were the technology companies. After several years of rock-bottom interest rates, their valuations were greatly inflated. Because their results depend heavily on projections of future cash flows, companies are worth more when those cash flows are discounted at favorable rates. Now, if clouds gather on the horizon and the price of money shoots up, future money will lose value. And with it the current ratings.

After the corrections in the technology sector, the declines started to reach the rest of the companies. Only a handful of energy and oil companies escaped the decline.

world exchange

On the stock markets of other economies, the value destruction was not as strong as in 2008. The Stoxx 600 index, which brings together the largest European companies, has a capitalization of three billion dollars, while in the previous crisis it lost 5.5 billion. In the MSCI World, which collects the world’s 3,500 largest companies, the correction was $20.5 billion compared to the $16.7 billion it lost this year.


Source elpais.com

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