The month-long slide in global stocks has wiped out at least $2 trillion in wealth, leaving investors few alternatives to preserve their holdings aside from bonds and money markets.
Investors have been dumping stocks, commodities and emerging market assets on growing concerns that economic growth will suffer from higher inflation and interest rates.
It is essentially one consistent story worldwide, starting here in the U.S. There is a fear that the Fed's repeated commitment to limiting inflation demonstrates a willingness to risk economic activity, said Christopher Low, chief economist at FTN Financial in New York.
Stock markets have been punished since the U.S. Federal Reserve raised interest rates for 16th time in a row on May 10 and issued a hawkish statement saying it may need to do so again to fight inflation. Investors had expected some sign of an end to the tightening cycle.
Global markets have suffered since, and strategists show little agreement about how deep and how long the sell-off will go. Bonds have been the most direct beneficiary of the equities route, with benchmark U.S. 10-year Treasuries staging their longest rally of the year since mid-May.
MARKETS FALL INTO THE RED ON THE YEAR
The Dow Jones industrial average is off 8.2 percent since mid-May and as of Tuesday's close had erased its gain for the year. The Nasdaq Composite Index is off 12.75 percent from its high for the year on April 19 and the Standard & Poor's 500 Index has fallen by nearly 8 percent from its May peaks.
On Tuesday, Tokyo's Nikkei average booked its biggest one-day percentage fall in two years, tumbling 4.14 percent, wiping out more than 16.56 trillion yen ($145 billion) in market value from the Tokyo Stock Exchange's first section. It was the biggest one-day point drop since immediately after the September 11, 2001, attacks on New York and Washington.
In Europe, the FTSEurofirst 300 index of top European shares has fallen about 11 percent since May 11. The index finished at 1,238.5 points on Tuesday, its lowest closing level since November 30.
Since its year high hit in early May, the MSCI World Index of global stocks has lost $1.9 trillion in market capitalization, nearly 12 percent of its value and more than the economic output of the United Kingdom.
The index compiled by MSCI Barra does not account for all global stocks, meaning the total amount of lost wealth is greater still.
As global central banks in Europe and United States have raised interest rates to cool inflation, investors are aggressively slashing their exposure to emerging markets as well.
OUTFLOWS FROM EQUITIES
Investors pulled out about $8.5 billion from emerging equities in the three weeks ending June 8, according to data from EmergingPortfolio.com Funds research. The benchmark MSCI emerging market stock index has lost about 24 percent since May 10.
We've seen a lot of panic selling by people who have gotten into emerging markets and commodities later in the game -- pessimism is high, said Scott Wren, a senior equity strategist with A.G. Edwards & Sons. People are sitting on a lot of cash and are afraid to get back in the market.
Given the drop-off markets, analysts said investors should now seek quality.
Tom McManus, chief investment strategist with Banc of America Securities said investors should look at the bonds of the stock market. Steady companies with strong earnings and geographic diversification.
These shares have been out of favor since about 1998, he added, and are the kind of companies Warren Buffett has been known to own -- companies with top-quality balance sheets and diversified earnings streams.
Shares held by Buffett include Coca Cola Co., American Express Co. , Wal-Mart Stores Inc., Wells Fargo & Co. and Anheuser-Busch. Each of these has retained their gains even as the S&P 500 has erased its advance and now stands 2 percent lower on the year.
The global sell-off, however, is not over and may only be just starting, according to JPMorgan Chase & Co.'s global equity strategist Abhijit Chakrabortti.
This is nothing compared with what we may see late in the summer and early October -- once slower growth finally sinks in and expectations for higher benchmark rates, at 6 percent or even more, come out, Chakrabortti told the Reuters Investment Outlook Summit in New York.
Sectors most dependent on growth and the companies most dependent on volume and price declines, which also includes tech companies, should be avoided, he said.
We like the big telecom providers such as Verizon and AT&T, as well as Colgate, he added. All three have soundly outperformed the market this year, gaining 4.75 percent, 10.3 percent and 12 percent, respectively.
Among U.S. mutual funds, investors pulled only $1.9 billion out of equity funds in the week that ended June 7, not a huge amount compared with outflows of $7.1 billion during the previous week, research firm TrimTabs reported late last week.
At Boston-based Fidelity Investments, the world's biggest mutual fund company, we have not noticed unusual activity during the past several days but we had strong money market inflows in May, said Vincent Loporchio, a spokesman.
(Additional reporting by Ros Krasny, Vivianne Rodrigues, Chris Reese and Svea Herbst-Bayliss in Boston)