Equity Market Sell-Off: Return to Reality?

Global equity markets are still hurting from last week’s sell-off. Yet the renewed volatility could mark a return to reality after an unusually long period of steady gains and may even foster a healthier investing environment over time.

Investors are understandably unsettled, especially given the dramatic spike in volatility (Display, left). The extremely high trading volume of exchange-traded funds (ETFs) last week added fuel to the fire (Display, right). But the speed and size of recent moves seems inconsistent with the fundamentals of the global economy and company earnings, because both are strong.

By the end of last week, US stocks had fallen more than 8.8% from their peak in January and at one point were down more than 10.0%, typically defined as a correction. Since the start of the year, the S&P 500 Index dropped 1.8% (Display). Markets in Asia and Europe have also been hit.