Of the world's leading indices, the Dow Jones Industrial Index on Monday saw its worst one-day points drop in history, while the Stoxx Europe 600 Index hit a five-month low and the Japanese Nikkei 225 hit a 19-month low.
On Monday, the S&P 500 index ended the day 4.1 per cent down and the Dow dropped 4.6 per cent or 1,175 points — its steepest ever fall in points.
This was followed by steep losses in Asia.
Japan's Topix index was down by more than 6 per cent at its low point before closing 4.4 per cent down, while the Nikkei 225 finished down 4.7 per cent. In Hong Kong, the Hang Seng index dropped 5.5 per cent.
As the markets have experienced the second-longest bull run on record these sharp falls have left advisers and their clients wondering whether this is a temporary correction or the start of a new phase for global equity markets.
Nick Dixon, investment director at Aegon, said taking US markets as an example, we’ve experienced over 100 months of positive returns now, and in the last 40 years only the period leading up to the dot-com bubble bursting lasted longer.
As a result, Mr Dixon said there are reasons for both caution and optimism, but added he leans towards a more cautious outlook.
He said: "On the one hand tech companies have driven much of the index growth since 2009 and these stocks now make up the second-largest component of US markets.
"But, unlike the period in the period leading up to the dot-com crash, today’s companies are for the most part built on fundamentally sound business models.
"On the other, price to earnings ratios look unsustainably high, particularly in US markets, and we believe many stocks are overvalued."
The other great unknown is how quickly the era of cheap money sparked by the credit crunch will come to an end, Mr Dixon noted.
He said there is a great deal of speculation over whether US interest rates will rise faster than many expect, reducing the amount of money which has been awash in the markets.
Mr Dixon said: "It has been our view for a while that exposure to US markets in particular should have been reduced.
"Further, in the context of richly valued equity markets and low yields on fixed income, cash has looked relatively attractive, especially for more conservative investors. Nothing we have seen in recent days has changed our view."
Oliver Blackbourn, manager with Janus Henderson’s UK-based multi-asset team, said with the US Federal Reserve taking away the easy stimulus punchbowl from the quantitative easing (QE) party and the European Central Bank (ECB) telling markets that they have probably had enough, asset prices are losing some of the support that has driven valuations to expensive levels.
He said there are few places to hide when everything has risen so strongly.
Mr Blackbourn said: "Market complacency and recent low volatility have likely led to some ill-disciplined positioning that is now being quickly unwound.
"History provides many examples of what happens when investors overextend themselves. However, for more dynamic investors like ourselves, these falls represent an opportunity.
"Global growth continues to strengthen and inflation is still relatively subdued, meaning that this is still a decent environment for corporate earnings growth. Having previously moved to fade the surge in the recent exuberance, we are looking for the appropriate moment to reinvest at more reasonable prices."
Lukas Daalder, chief investment officer of asset manager Robeco, said there is no need to panic over the equity market correction as the underlying global economy is strong.
He said one of the main characteristics of this sell-off is that it is equities – normally you would expect all risky assets including high yield bonds and emerging market debt to also sell off, but losses in these asset classes have been small.
As such, he said this seems to indicate that this is much more of a technical correction, especially in stocks that were continuing to go up and up without any reason.
Mr Daalder said: "They had become rather overbought, so at some point you are going to get a correction."
Mr Daalder says investors should focus on the underlying economic fundamentals that remain positive for equities long term, rather than the inevitable drama that the ‘sea of red screens’ always brings.
He said: "It doesn't feel like a life-threatening situation because the global economy is doing fine."
Guy Foster, head of research at Brewin Dolphin, agreed that what we are seeing is a bit of a shake-out in the equity markets around the world.
While it may feel traumatic, Mr Foster said it was not in many ways surprising.
Mr Foster said: "We expected volatility to pick up, as central bankers, who had hitherto been smoothing the path for investors with unnatural amounts of liquidity, have been trying to quietly withdraw their support.
"Interest rates are rising at a time when the economy needs money for the increased corporate investment activity which is taking place. That means there won’t be the constant flow of money into the equity market which has been supporting prices over the last couple of years
"The real challenge for investors after an environment of very low volatility is that they may be unnerved as it normalises. More volatility means more opportunity for active investors with strong nerves."
emma.hughes@ft.com
